Buyers, Real Estate Advice, Trends

What You Should Know About Home Affordability

March 13, 2023

During your search for a new home, there are many key factors to consider, from your daily commute distance to included appliances. One of the most important aspects to consider however, is the affordability of the home. For many potential buyers, this can be the tipping point in their decision making. So let’s talk about what influences affordability and why it matters to you.

What is Home Affordability?

Home affordability refers to the ability of a prospective homebuyer to purchase a home without facing financial strain. It is influenced by many factors including mortgage rates, location, home prices, income, and debt.

The past year has seen many changes in the housing market, including rising mortgage rates and rapidly changing home prices that made affordability a major roadblock for potential buyers. Although the exact outcome will vary between local markets, most experts agree that this year will see more stability in the housing market that will help boost affordability. One expert opinion states, “… with slowly improving affordability and a more optimistic economic outlook than previously believed, the housing market could show resilience in 2023.” [1] Here are some of the key factors for home affordability.

Mortgage Rates Drive Affordability

One of the clearest impacts on affordability is mortgage rates. As mortgage rates rise and fall, they either open or close the door for potential buyers. To illustrate this idea, one expert gives this example, “with a 6% rate instead of 7%, buyers pay about $2,700 less every year on their mortgage. As a result, owning a home becomes affordable to about 1.4 million more renters and 4.3 million more homeowners” [2].

With a better understanding of the correlation between mortgage rates, we can see how the changes in mortgage rates we are expecting to see in 2023 will impact affordability for millions of homebuyers. NAR’s Lawrence Yun said, “the upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November” [3]. We know that mortgage rates have fallen since the end of last year, and experts predict they will continue to normalize throughout the year [4], meaning affordability will follow.

Home Prices and Wages

Another key factor in measuring home affordability is the ratio of your income to the cost of a home. As home prices increase, the ratio of a person’s income to the cost of the home also increases, making it more difficult to afford the home. For example, if someone earns $50,000 per year and is looking to purchase a $300,000 home, the income-to-home price ratio is 6:1. If prices increase and that same home then costs $350,000, the income-to-home price ratio increases to 7:1, making it more difficult for them to afford the home.

Normally, wages tend to increase alongside inflation and rises in cost of living, which helps mediate the impact of home price increases [5]. On the other hand, if wages do not keep pace with increases in home prices, it can make it more difficult for potential buyers to afford a home.

In addition to the income-to-home price ratio, your debt-to-income ratio, which is the percentage of your monthly income that goes towards paying off debt, influences affordability as well. This is because your debt-to-income directly affects your ability to qualify for a mortgage and make monthly payments on that mortgage.

The Takeaway

Buying a home can be a very rewarding investment in your future in many ways, but deciding which home to buy requires careful planning and consideration to make sure you can comfortably afford your new house. Ultimately, the decision is based on your individual financial situation and housing goals. When determining affordability, a great place to start is by researching current mortgage rates and market trends, and comparing the price of potential homes to both your income and monthly expenses.