By David Paciello, Broker One Realty Partners
At this moment in time, the United States has experienced the longest economic recovery on record. For the most part, markets across our country have recouped the losses in residential housing, save a few housing markets. But what does this mean? Here we are over 10 years since that event, and we’ve experienced a progressive increase in the value of homes, to the point where many places across the country are having an affordability crisis.
As the owner of a fast-growing indie real estate brokerage in Upstate New York, I’m frequently asked, “What is driving the rise in prices?” and “Why is housing inventory so low?” For our region, I give the same answer time and time again, Baby Boomers are not selling at the rate that we anticipated. Conversely, Millennials having cycled into the housing market later than other generations and are now arriving in droves which has caused pent up demand. Scarce inventory plus strong demand equates to higher prices. Basically, Economics 101.
Affordability hasn’t impacted our region as much other parts of our country but let’s consider what the future holds. The median household income across the country is just over $60,000/yr. (it’s just right around $50,000 in my hometown). Assuming normal parameters, a prospective buyer making $50,000/yr. with a monthly debt of $450 can afford $145,000 on a 30-year conventional mortgage with the minimum down payment of 5% (around $7,500) if you utilize a standard mortgage affordability calculator online. $145,000 is just over our local average home price of $140,713 and well below the national average of $275,000.
What does this mean? As of right now, while much of the country is experiencing a drop-in affordability, home affordability right here in Upstate New York is great but that could change. As the last pocket of affordability in New York State, Upstate is experiencing rising prices, if we apply the same methodology as the National Association of Realtors, our local numbers show a pretty rosy view of housing affordability (see Fig. 1). The higher the Affordability Index, the better easier it is for a buyer to afford a home.
Does this model tell us the whole story for markets like ours? We applied the same model to our local values, but we made some simple assumptions. First, we assume that a Buyer is going to put 5% down (instead of 20%) which would increase their principle balance owed. By doing this, we have to account for Private Mortgage Insurance or PMI which is required when putting down less than 20% to offset the risk of default. We estimated monthly PMI at $115/mo. Finally, we also are taking into account average annual property taxes of $3,000/yr.
When we consider these assumptions, we get very different numbers (see Fig. 2). As a result, payment as a percentage of income for 2018 rises from 11.4% to 21.7% and the Affordability Index drops nearly 100 pts.
While affordability drops when we consider these assumptions, keep in mind that the monthly debt payment along with tax and PMI buyers are still within the average rent for a mid-grade 3-bedroom apartment for our region at under $1,000/mo. It is also vital that the average homeowner will realize wealth growth 44 times greater than the that of the average renter!
The point of this research has several parts:
- Prices are rising faster than wages across the country and in suburban/rural communities like ours.
- While affordability may be dropping, it is still advantageous for buyers, especially first-time homebuyers to make a purchase
- It is absolutely vital that buyers consider their expenses when evaluating what they can afford.