Not everyone is ready to buy a home at the same time, but despite the health crisis, now is an ideal time to buy. Understanding how housing affordability works and the main factors that impact it may help homebuyers narrow down their ideal time frame to make their purchase.
There are three main factors that go into determining how affordable homes are for buyers:
The National Association of Realtors (NAR), produces a Housing Affordability Index, which takes these three factors into consideration and determines an overall affordability score for housing. According to NAR, the index:
“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”
Their methodology states:
“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”
So, the higher the index, the more affordable it is to purchase a home. Here’s a graph of the index going back to 1990:
The green bar represents today’s affordability. We can see that homes are more affordable now than they have been at any point since the housing crash when distressed properties (foreclosures and short sales) dominated the market. Those properties were sold at large discounts not seen before in the housing market.
Although there are three factors that drive the overall equation (as mentioned above), the one that’s playing the largest part in today’s homebuying affordability is historically low mortgage rates. Based on this primary factor, we can see that it is more affordable to buy a home today than at any time in the last seven years.
If you’re considering buying your first home or moving up to the one you’ve been dreaming of , it’s important to understand how affordability plays into the overall cost of your home. With that in mind, buying while mortgage rates are as historically low as they are now may save you quite a bit of money over the life of your home loan.
If you feel ready to purchase a home, doing so now may save you a significant amount of money over time based on historic affordability trends. Connect with us today so we can determine if now is the right time for you to make your move.