3 Key Components Influencing Home Affordability

3 Key Factors Affecting Home Affordability

In the past year, there has been significant discourse surrounding the tightening of housing affordability. However, there has recently been a slight alleviation in this regard, as mortgage rates have decreased since reaching their peak in October. It is crucial to recognize that home affordability is not solely determined by mortgage rates.

To gain a comprehensive understanding of home affordability, one must consider the interplay of three pivotal factors: mortgage rates, home prices, and wages. Let's delve into the most recent data for each of these elements to know the reason behind the improvement in affordability.

1. Mortgage Rates

In recent months, there has been a decline in mortgage rates. Looking ahead, the consensus among most experts is that these rates are anticipated to further decrease throughout the year. Economist Jiayi Xu from Realtor.com provides insights into this trend:

“While there could be some fluctuations in the path forward … the general expectation is that mortgage rates will continue to trend downward, as long as the economy continues to see progress on inflation.”

And even a slight alteration in mortgage rates can significantly influence your purchasing power, simplifying your ability to afford the desired home by decreasing your monthly mortgage payment.

2. Home Prices

The second crucial factor is home prices. Following a relatively standard increase last year, they are projected to continue growing moderately in 2024. This is attributed to the fact that, despite a slight anticipated growth in inventory this year, there remains an insufficient supply of homes for sale to meet the demand from potential buyers. As stated by Lisa Sturtevant, Chief Economist at Bright MLS:

“More inventory will be generally offset by more buyers in the market. As a result, it is expected that, overall, the median home price in the U.S. will grow modestly . . .”

This is encouraging for you because it suggests that prices are unlikely to surge dramatically, as witnessed during the pandemic. However, it also implies that delaying your purchase might result in higher costs. Therefore, if you are prepared, eager, and financially capable of buying a home, doing so before additional buyers enter the market and drive prices higher could be advantageous.

3. Wages

Another contributing factor to the current affordability is the increase in income. The graph below, utilizing data from the Federal Reserve, illustrates the growth in wages over time:


Observing the blue dotted trendline on the graph reveals the typical rate at which wages increase. However, on the right side of the graph, wages presently exceed the trend line, indicating a higher-than-normal rate of increase.

Elevated wages contribute to enhanced affordability by lowering the percentage of your income required to cover your mortgage. This is because a smaller portion of your earnings needs to be allocated to your monthly housing expenses.

What This Means For You

The affordability of homeownership hinges on three critical factors: mortgage rates, home prices, and wages. The positive news is that these factors are collectively moving in a favorable direction for prospective buyers.

Bottom Line

For those contemplating a home purchase, it's crucial to understand that the key factors influencing affordability are experiencing positive shifts. To stay informed about the latest developments in each of these factors, consider consulting with us, the Focus Real Estate Team.

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