Mortgage rates have dropped for some homebuyers but home affordability is near a six year high. How does that work when interest rates are so low? Home prices have been rising so the combination of interest rates, home prices and a small down payment means that less than two thirds of US homes were considered affordable in the last quarter.
Some of the recent data shows that home prices are up an average of four percent nationwide. Mortgage interest rates may have bottomed out. So as interest rates start to rise and home prices continue to rise, more homebuyers will have problems finding homes that they consider affordable. So does that mean that now is really the time to buy a new home? That answer will depend on where interest rates go in 2015, how much housing prices continue to change and the availability of low down payment mortgages.
Home affordability is based on the average home sales price for the area, the thirty year mortgage rate for the time period and figures out the monthly payment for the average home price. Then they use the average income for the area and calculate an "affordable" home price. The home price should be about 28% of the average income. When we qualify you for a mortgage, ideally the mortgage payment including taxes and insurance should be about 28-33% of your gross income. The is what we call the front end debt to income ratio. The back ratio should be under 45%, especially for conventional loans.
Home affordability has decreased over the last few years as the economy has recovered. The National Association of Home Builders released affordabilty numbers and in the last quarter of 2014, home affordability was at 62.8%. This means that 62.8% of US homes were affordable for those earning the national median income of $62,900. In 2012 that rate was at 74.9%.
Going forward, home prices are expected to continue to rise, income is expected to be flat. The question that we don't know the answer to is what are mortgage interest rates going to do. Since the start of 2014, mortgage rates have fallen an average of about .75%. They have been moving around a little bit, slighlty up in the last month. But as 2015 continues, we'll see if the interest rates continue where they are or go up. If they start to go up, that means now is definitely the time to buy a new home!