Affordability’s Three “Ingredients”: Housing Prices, Mortgage Rates, & Employment
Don’t rising home prices make homes less affordable?
In general, yes.
The exception is when interest rates are falling faster than home prices are rising — the case right now — and wages and employment are improving (also true).
From 4.6% to ????
So, from a high of 4.6% last Fall, rates on 30-year fixed mortgages are now 4.2% — a drop of about 10%.
Assuming that a (conservative) home Buyer puts down 20% and finances the remaining 80%, that translates into an 8% bump in purchasing power.
Combine a cheaper mortgage with a stronger employment picture — the other component of affordability — and the net result is that affordability is likely up at least 10% the last six months.
That compares with a Twin Cities housing market that appreciated 8% during that period (16% annually).
Bottom line: 10% is more than 8%, ergo, affordability is up since six months ago.
P.S. So, how many finance experts predicted that mortgage rates would be significantly lower in May than at the beginning of the year?
That number’s easy: zero.
See also, “Interest Rates and (Un)Conventional Wisdom”; and “Shaky Stocks = Lower Interest Rates = Housing Market Kick.”