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When it comes to deciding to purchase a home, affordability often has little to do with the timing of that decision. For most of us, a home purchase is a life decision based on how we want to live and how we want to raise our families.
So, when a couple gets married and begins a family or when they determine they need a larger home as their family grows, they find themselves at the mercy of various markets. Depending on how those markets are behaving, the couple can find they are buying at a great time or they can find they are buying at a not-so-great time.
As it turns out, people who either are now buying their first home or are moving up to a more expensive home are likely buying at a historically opportune moment.
The two markets that govern how well buying a home will be are: 1) the housing market and 2) the bond market.
The housing market’s effect is obvious. If homes have increased significantly prior to purchasing a home, it’s likely that future housing price gains won’t be as robust. But, if homes have dropped significantly in price, it’s much more likely that they will increase in the coming years.
The bond market impacts interest rates. Houses really have two price tags. One is the cost of the home itself and the other the cost of borrowing to buy that house. Obviously, the higher the interest rate, the more interest one will have to pay over the life of the loan.
Well – it just so happens that right now, both of these price tags are marked as “Reduced!”
Home prices plummeted from 2006 until 2010. They haven’t gone up much since 2010 until recently when home prices have begun to move higher.
Mortgage rates dropped like a rock after the financial crisis of 2007/8 and remain near all-time lows.
So, when historically low home prices meet historically low mortgage rates – what do you get? You get a very affordable home.
This graph is called the “Housing Affordability Index.” When the Index is at 100 (noted by the horizontal line), it means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home.
When the graph is above that line it means the combination of home prices and interest rates are creating an environment where a person with the median income can afford MORE than the median-priced home.
Notice that the Index has skyrocketed in recent years and is higher than it’s been at any time since it has been tracked.
People should make the decision to purchase a home based on how they want to live their lives rather than as a purely investment-driven decision. But when the economics match up with one’s life – it’s a great opportunity!
Bob Walters is the chief economist at Quicken Loans. Walters joined Quicken Loans, then Rock Financial, in 1996 after holding positions at both NBD Bank (now owned by JPMorgan Chase & Co.) and DMR Financial Services.