The Three Components of Affordability in Real Estate Explained

Hey guys, in real estate, we often hear the word "affordability". What does it mean and how can we break it down for our clients? Affordability has three components.

The first one is how much people are making. In the last year, on average, wages have gone up a little over 7%. So people are making a little bit more, which means they can afford a little bit more in their house.

The second leg of this is housing prices. Housing prices have flattened out compared to what we were seeing in 2019 and 2020, and in some markets, we're seeing some declines. Last quarter, home prices decreased by about 4%, which is significantly less than the double-digit gains we have seen in previous years.

The last component is interest rates. Interest rates are having the biggest impact on affordability. But it is important to remember that when buying a home, home prices are permanent, but interest rates and wages are temporary. As wages generally increase year after year, two of the components have the ability to help affordability over time.

Locking in the low home price that we can get today can give us a big advantage over other markets. For savvy buyers, this is a great time to buy a house. If we lock in the low price now, we know our wages are likely to grow, and interest rates are likely to fall. As interest rates hit 60-year lows over the last 10 years, it is highly likely that rates will be coming back down towards the end of the year and into 2024 as the economy starts to cool off. Refinancing later as rates come back down is also an option.

So, if buyers are thinking it through, they should lock in the low home price now and take advantage of the potential for wage growth and falling interest rates in the future. This is definitely a topic to talk about with clients in the market, and maybe even a video to shoot.

Hope you're having a great day. Good selling.

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