The real estate market is soaring today. Home values are rising, and that’s a big win for homeowners. In 2020, there was a double-digit increase in home values – a trend that’s expected to continue this year.
However, these prices are causing many to start questioning whether of not they can afford to by in the current housing market. Many are quick to emphasize the fact that homes today are less affordable than they were last year. Black Knight, a leading provider of data and analytics across the homeownership life cycle, just reported on the issue.
The findings show the historical averages of the national payment to income ratio, which they define as “the share of the median income needed to make the monthly payments on the median-priced home.” Their study reveals:
- The average over the last 25 years was 23.6%
- The average over the last 5 years was 20.1%
- The average today stands at 20.5%
Right now, housing payments are slightly less affordable than the five-year average – but only by less than ½ a percentage point. However, they’re significantly more affordable than the 25-year average. Put another way, a buyer will likely make a slightly greater financial sacrifice to afford a home right now than if they purchased a home within the last five years. On the other hand, it also means the potential financial sacrifice is not nearly as great as it was over the last 25 years.
Does making a sacrifice to buy a home today make financial sense in the long term?
Last week, the Federal Reserve announced that, in the first three months of the year, household net worth increased by $968 billion 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 continues to be the cornerstone to building personal wealth. For most Americans, their home is the largest asset they own. On top of that, the difference between the net worth of homeowners and renters is significant at every income level. Here’s a table detailing that point using data from a study done by First American:
Owning a home is an important step to grow a homeowner’s net worth. Despite the slightly greater sacrifice in the percentage of your monthly income for housing, most homeowners understand the reward of starting to build equity now.
As prices have risen dramatically over the last year and a half, it is slightly less affordable to buy a home today. However, when you consider the gain in equity and weigh the benefits of building your net worth, can you afford NOT to buy now? People may feel as though they’re “overpaying” today but in 10 years, barring any catastrophic world event, homes will appreciate solely on time of ownership. How many times have you heard friends or family say, “I’m glad I bought when I did.” Not to mention low rates make a difference. If rates go up 1 point, prices could soften by 12%. so a home valued at $500,000 today would be worth $441,000 based on keeping the monthly payment the same and an increase of 1% in the interest rate.