Is Affordability Starting To Improve?

Is Affordability Starting To Improve?

Over the past couple of years, many people have struggled to buy a home. While affordability remains challenging, there are indications that it's gradually improving and could continue to do so as the year progresses. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), notes:

“Housing affordability is improving ever so modestly, but it is moving in the right direction.”

Here's a snapshot of the most recent data on the three key factors influencing home affordability: mortgage rates, home prices, and wages.

1. Mortgage Rates

Mortgage rates have fluctuated throughout the year, ranging from the mid-6% to low 7% range. However, there's positive news—according to data from Freddie Mac, rates have been gradually trending downward since May (as shown in the graph below):

Mortgage rates have improved recently, partly due to positive trends in economic, employment, and inflation data. While some rate fluctuations are expected moving forward, experts believe that if economic indicators continue to cool, mortgage rates could continue to decrease.

Even a slight drop in rates can benefit you by making the home you want more affordable, as it reduces your monthly payment. However, it's important to remember that rates are unlikely to return to the 3% range.

2. Home Prices

The second major factor to consider is home prices. On a national scale, home prices are continuing to rise this year, but not at the rapid pace we saw a couple of years ago. The graph below, which utilizes data from Case-Shiller, highlights this trend:

If you're considering buying a home, the slower pace of price growth is encouraging news. During the pandemic, home prices surged significantly, making it challenging for many to purchase. Now, with prices increasing at a more moderate rate, homeownership might seem more attainable. As Odeta Kushi, Deputy Chief Economist at First American, explains:

“While housing affordability is low for potential first-time home buyers, slowing price appreciation and lower mortgage rates could help – so the dream of homeownership isn’t boarded up just yet.”

3. Wages

Another positive factor contributing to affordability is the rise in wages. The graph below, based on data from the Bureau of Labor Statistics (BLS), illustrates how wages have steadily increased over time:

Take a look at the blue dotted line, which represents how wages typically increase in a standard year. Notice on the right side of the graph that wages are currently rising even faster than usual, as shown by the green line. 

This benefits you because when your income grows, affording a home becomes easier. You'll have to allocate a smaller portion of your paycheck to your monthly mortgage payment, making homeownership more attainable.

Bottom Line

When you consider all these factors together—mortgage rates trending down, home prices rising more slowly, and wages increasing faster than usual—it becomes clear that while affordability is still a challenge, these trends are early indicators that things might be starting to improve.