The Affordability Puzzle's Missing Piece

Today’s real estate market is booming. Home values are increasing, which is great news for homeowners. Home values increased by double digits in 2020, continuing a trend that is projected to continue this year.

However, rising costs are forcing others to question whether the current housing market is affordable. Many people are eager to point out that homes are less inexpensive today than they were last year. The problem was recently highlighted by Black Knight, a renowned provider of data and analytics across the homeownership life cycle.

The statistics show the national payment to income ratio through time, which they define as “the fraction of median income required to make monthly payments on a median-priced home.” Their research uncovered the following:

Over the last 25 years, the average has been 23.6 percent.
Over the last five years, the average has been 20.1 percent.
The current average is 20.5 percent.

Housing payments are currently marginally less affordable than the five-year average — but only by less than 12%. They are, nevertheless, much less expensive than the 25-year average. To put it another way, a buyer will likely make a slightly more financial sacrifice to buy a home now than they would have done five years ago. On the other side, it means that the financial cost isn’t nearly as high as it was in the previous 25 years.

Is it financially prudent to make a sacrifice now in order to purchase a property later?

Last week, the Federal Reserve announced that, in the first three months of the year, household net worth increased by $968 billion based solely on the values of the real estate they owned. Another report from CoreLogic reveals the average annual gain in homeowner equity was $33,400 per borrower.

Homeownership is still the most important factor in accumulating personal wealth. For the vast majority of Americans, their home is their most valuable asset. Furthermore, at every income level, the difference between the net worth of homeowners and renters is large. Here’s a table that illustrates that concept using data from a First American study:

Owning a home is an important step toward increasing a family’s net worth. Despite the somewhat higher proportion of monthly income you’ll spend on housing now, the benefit of starting to build equity now will be worth it for most homebuyers.

Bottom Line

Because prices have climbed considerably in the last 18 months, buying a home today is slightly less affordable than it was a year ago. When you consider the equity gain and the long-term benefits of increasing your net worth, you may wonder if you can afford to wait.