Home Affordability
Finances,  Home

Home Affordability is a Problem

We bought our house in December of 2020. At the time we lived in a somewhat cramped 900 square foot apartment and paid $1900/month for the pleasure of living next to random people. We also didn’t have a garage(those cost extra), had a pet fee for our dog and rented out a $100+/month storage unit for my wife’s stuff.

The apartment was a nice place, modern and in a decent area but it was still lacking in a variety of things and quite costly for what it was.

We had been looking for a house for about two years and finally saw a listing towards the latter part of 2020 in one of our favorite neighborhoods. It was listed at $475,000. We saw it, wanted it, made a spur of the moment decision even if it was above our budget, made a full price offer the same day and closed a month or two later.

Now, $475,000 is a lot of money and far above the initial budget of $300,000 we set for ourselves when we started looking in 2018. Yea, that’s a big leap in two years. However, we soon realized that $300,000 wasn’t going to get us anything great in the towns we were looking at and had to up that budget.

Our budget was just north of $400,000 when we saw that house and made that offer. Still a pretty big leap but we really liked the house(and we love it now).

At the time, mortgage rates were historically low and we basically did the math and realized that at 2.75%(our interest rate) and after our down payment, we would be paying about $2400/month for the home(inclusive of taxes and home insurance).

That didn’t seem that bad when when we considered that we’d have double the space, a nice yard, a much better neighborhood and the ability to build equity and own something of our own. Apartments are nice and come with a lot of benefits but houses do too and the comparison seemed to weigh in favor of the house even if we paid a bit more than we originally bargained for.

That’s because in our neck of the woods, rents had gone up faster than home prices which at that time had remained pretty static. Our home, for example, based on the price it sold for in the 90s and the price we paid for it in 2020 had grown at a sub 2% rate. It felt like a good time to buy given that our state is pretty neat.

Still, I wasn’t looking at a home as an investment but as a place to live and this seemed like something that could be our forever home.

However, I also found myself looking at my $1950/month rent payment that had gone up 3%+ annually since we lived there, a slightly more comparable 1200 square foot 2 bedroom in the same complex for $2450/month versus a mortgage at $2400/month and the calculus seemed easy.

I could either pay $2400/month for double the space and lock that price it(outside of higher taxes) or have rent that’ll likely be at that price point in a few years.

Now, obviously, the comparison isn’t exactly the same since the mortgage included a decent sized down payment that not everyone could afford plus home ownership involves paying for anything that breaks and maintaining it but still, it made sense at the time.

That was especially true considering that inflation seemed like it was ticking up just a bit and home bidding wars were becoming more and more common.

Plus, we just wanted a house. Buying a home versus renting is probably more of a lifestyle choice than anything and we were looking forward to the lifestyle that owning a home offered.

Now, at the time, home affordability seemed fine to me. The cost comparison against rent was favorable and we jumped on it. We’ve been here two years and the lifestyle choice was clearly the right one but the financial aspect of it was even more right.

Inflation is a problem now and everything reflects that. The same apartment that we rented is now up to $2195/month, a 12% bump across two years which crazily enough is a much lower increase than many hot markets have seen. The 2bd place is now north of $2800/month.

Inflation not being transitory as many said has sent mortgage rates up to 6% and many people are being quoted rates higher than that.

How about home prices? Through the roof!

If we wanted to buy our home today, we’d likely have to pay closer to $550,000 or perhaps more. Despite the high mortgage rates, homes in this neighborhood are still selling within a week at prices above asking. It’s looney town!

Home affordability is a problem because I don’t think we’d be able to afford this home today and would be stuck in an apartment with rising prices. It think that’s the situation many find themselves in right now.

Rent is up but our current payment hasn’t changed. It’s still 2400/month. I do expect it to change soon due to a probable rise in property tax(due to higher property values) but even then it shouldn’t be a huge bump and still provides us with much more than the apartment ever did.

So what would happen if we hadn’t bought then and wanted to buy now?

We’d be in trouble! Even if we could get the house at the same price, our payment would go up to $3172/month and a more realistic purchase price would shoot it north of $3400/month as shown below.

Home Affordability

That’s a 30-45% increase in monthly payments at a time where incomes aren’t going up nearly that and budgets are stretched even more due to rising costs in other areas. Whereas home affordability against rent made sense back then I don’t know if it makes sense much sense now given that rents have gone up at a much smaller clip. Add home maintenance costs to that total and the difference is even bigger.

It’s a problem. This data isn’t long term but the trend is clear and it’s only gotten worse since April update as rates continue to go up and prices show no signs of abating.

So how does this fix itself? Well, in most situations, higher rates leading to higher payments would lead to prices coming down. It’s possible that happens even though we haven’t seen it yet.

Housing can take a while to react to changes in demand. Many asset classes have already fallen in reaction to changing economic conditions but home prices continue to remain steady. That’s because people are often unwilling to lower prices even if demand seems to be falling off.

Housing in general is a very localized market too. While our market has gone up quite a bit, it hasn’t been anywhere near the price appreciation that have happened in certain geographic pockets. It’s possible that demand will stick around in certain markets and fall off in others. Even within our state, I have already seen pockets were houses that used to disappear in days are staying on the market longer and longer.

Price cuts which rarely happened before are starting to trickle in a bit more often. I’ve heard similar stories in other markets on some real estate forums and we may be at a precipice of falling prices.

It may simply be a Wile E. Coyote situation where the poor housing market has already run off the cliff but is simply running on air for the brief seconds before it inevitably falls down. Now these seconds may be months in the real world but the analogy still applies!

Now that’s not to say that prices will suddenly drop 50% like certain stocks unless we have a big economic crisis and home owners start losing their jobs and then losing their homes.

After all, unemployment is still low and the economy keeps chugging along.

Supply is still low in most markets. People may also be less willing to change homes if they’re locked in at a 3% rate and now have to buy at a 6% rate. The payment may not be worth it especially if home prices stay elevated.

Demand may still be relatively high as people want to change from apartment living to a home like we did a few years ago. The work at home shift has people searching for more space and even if home affordability is bad, so are rent costs. The cheapest place to rent in my town is an 865 square foot townhouse at $1800/month. That’s one of 14 options currently available. If you want to actually rent a house, it’s $3500/month for a 2000 square foot home. What a deal!

There are towns around here that have more of a selection at cheaper prices but even those are rising quickly.

If inflation is here to stay, are those prices coming down anytime soon? That’s hard to tell and if alternatives stay elevated then maybe homes do the same even with higher rates. I’m not expecting a massive correction as housing is still a requirement and building new homes costs more now too given higher input costs.

However, these higher rates combined with higher prices are certain to have at least a small impact on prices to bring home affordability back to an equilibrium if we’re not there right now. It seems like we’re not given the uptick in homes sticking around a bit longer.

The good ones still go fast but at least the reasonability is starting to come back to homes that need a lot of work. I guess we’ll see what happens. Stocks are down, bonds are down, crypto is down and homes seem to be the last bastion of stability but will that last? I’d rather home prices come down so more people can have access to home ownership. After all, I don’t see rates coming down anytime soon unless inflation starts to trickle down. I certainly don’t want Wile E. to fall off a clip but maybe a small tumble to get home affordability back to norms would be good.


  • Steveark

    I think your math is good but you did leave out an important cost. Maintenance, which is zero on rentals, is generally agreed to run 1 to 4% of the cost of your home, annually. So in your case if it’s 2% that would add $700 to your monthly mortgage and kicks it up to $3,100. You can say you haven’t spent that yet, but you have. It is just that it shows up as a $40,000 roof replacement or a $20,000 HVAC system repair in the future. In your case that doesn’t change the balance between owning and renting, you still made a smart economic choice. But it is something to keep in mind when running the numbers.

    • TimeintheMarket

      Steve, you always bring up great points I always forget. Added some verbiage around that. We’ve already had our water heater go out and had to fix our garage door since we’ve been here so the costs certainly add up. That’s even more true now that home fixes are a lot more than they used to be due to the same reasons everything else costs more. Hell, we got a credit to fix our skylights when we bought our homes and are JUST now getting that done because of how backed up everything was. Luckily, the credit still covered the full cost of the skylights.

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