Home Prices Outpace Pay Increases

Borrowing, Home Purchase Loan, Investing & Retiring, Jobs, The Economy

Affordable Housing? What Affordable Housing?

Affordable housing is increasingly hard to find in today’s market. According to data from Trulia, America’s inventory of starter homes has decreased by almost half compared to six years ago while prices rose by almost 58%.

As consumers recovered from the housing crisis and Great Recession, more people became financially able to own a home. The existing supply was quickly consumed, leading to the current imbalance.

Recent polls suggest that affordable housing woes will continue through 2018 and beyond. According to a Reuters poll of property market analysts, home prices are expected to increase at almost double the rate of wages through 2018. Home prices are predicted to gain 5.7% more over the course of the year, while average annual earnings growth is predicted to be 2.8% – slightly above the predicted inflation rate of 2.5%.

At least inflation is expected to stay more in line with wages, helping prospective homebuyers who are trying to save up for down payments – but little relief is in sight for home prices.

Wages Aren’t Keeping Up

Wages are finally beginning to rise as unemployment levels reach new lows. May’s 3.8% unemployment level is the lowest since 2000. However, the pressure on employers to find workers hasn’t produced proportionally higher wages. Annual wage increases are still stuck below 3%.

Wage growth may hit the 4% range by 2019 – but the Reuters poll predicts that home prices are still likely to beat out wages with a 4.3% growth rate in 2019. The supply issue is expected to ease in 2020 as home prices are expected to rise by only 3.6%.

Unfortunately, the home price correction may come from the demand side instead of the supply side. While housing starts continue to trend upward, not enough of them are in the affordable range. Even though demand is high, rising land and labor costs make it difficult for developers to make money catering to the lower-end market.

Meanwhile, rising prices may force marginally qualified homebuyers out of the home-buying market entirely, easing demand and eventually slowing price growth – but how many homes will be truly affordable by then?

Don’t Forget About Interest Rates

There’s one more obstacle for potential homebuyers to consider. Mortgage interest rates are rising, too – although, in historical terms, today’s 4.7% rate is still a decent deal. From 1972 to 2008, mortgage interest rates were never below 5%.

The Federal Reserve is expected to continue to raise interest rates throughout 2018 and 2019 to bring them back toward historical norms. Expect mortgage interest rates to follow. The Reuters poll predicts the average interest rate on a thirty-year mortgage to reach 5% by the end of 2019, but we are on pace to reach 5% well before then.

We’re Buying Anyway

With all of these hindrances, you might think first-time homebuyers would be dropping out of the market or preparing to save up for a future purchase. Evidence from Freddie Mac suggests the opposite is true – homebuyers may be stretching their budgets to buy now before they are priced out entirely. First-time homebuyers made up 46% of new mortgages in the first quarter of 2018 – the largest number since Freddie Mac started collecting share data in 2012.

You may be trying to make that same decision – can I afford to buy a house now, or can I afford not to buy a house now?

Only you can answer that question, but make sure your decision is based on a realistic assessment of your finances and housing needs. Don’t think you have to buy a home now because “everyone else” is buying one.

The Takeaway

When you want to buy a home, but home prices are rising faster than your paycheck, it’s more important than ever to make the most out of your take-home pay. Keep your budget on track and your credit score high so you can act when you find that rare good housing deal. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.

Lay out your budget over time, including major expenses such as future college costs and retirement savings contributions. Next, use online mortgage calculators and budgeting guides to help you determine how much house you really can afford to buy. A realistic assessment is necessary to help you from overextending yourself and creating long-term financial difficulties. Seek the help of a financial professional if necessary.

Once you know you’re ready to enter the market, consider getting pre-qualified for a loan to verify that you really can afford your preferred home.

You may also want to review your housing goals. What’s your definition of affordable? Outline your needs vs. wants in a home. You may find a reasonably priced home that saves you from other financial stresses. If you are fairly handy, consider a fixer-upper where you can increase your wealth through sweat equity.

If all else fails and your income still doesn’t support a home purchase, maybe it’s time to ask for a raise – or find a better paying job while unemployment is still low.

MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.

Photo ©iStockphoto.com/CHRISsadowski

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