The Main Misunderstanding about Homebuying

Originally Posted on 2/22/2020

It seems that home values are on the rise after more than a year of slowing down. As explained by Zillow's Director of Economic Research, Skylar Olsen, in a recently published article:

“A year ago, a combination of a government shutdown, stock market slump, and mortgage rate spike caused a long-anticipated inventory rise. That supposed boom turned out to be a short-lived mirage as buyers came back into the market and more than erased the inventory gains. As a natural reaction, the recent slowdown in home values looks like it’s set to reverse back.”

CoreLogic agrees with Olsen, projecting an appreciation in home values in their January 2020 Market Pulse Report. They are expecting home values to go up in all fifty states this year. Here's what they expect to happen:

• Appreciation of 5% or more in 21 states
• Appreciation between 3 to 5% in 26 states
• In just 3 states they anticipate appreciating of less than 3%

The Big Misunderstanding

It is a general misconception that when home prices go up, it becomes less affordable to own a home. This is not necessarily always true.

Most homes are partly, or even entirely, financed using a mortgage. That means that current mortgage rates are an essential component when looking at affordability. And mortgage rates have gone down by almost a whole percentage point over the past year.

Another critical factor is the buyer's income. Median household income has improved by 5% over the twelve months, helping improve affordability tremendously.

The most recent issue of the Mortgage Monitor  by Black Knight addressed this very issue:

"Despite the average home price increasing by nearly $13,000 from just over a year ago, the monthly mortgage payment required to buy that same home has actually dropped by 10% over that same span due to falling interest rates…

Put another way, prospective homebuyers can now purchase a $48K more expensive home than a year ago while still paying the same in principal and interest, a 16% increase in buying power."

Conclusion

Anyone in the market to purchase a home must realize that homes are still affordable despite rising home prices. As concluded by the Black Knight report:

"Even with home price growth accelerating, today's low-interest-rate environment has made home affordability the best it's been since early 2018."