Understanding How House Prices and Rates Impact the Housing AffordabilitySeptember 1st, 2021 by Administrator
In recent years, the housing market has undergone an extreme surge in terms of growth. Listings have disappeared from the real estate market faster than most buyers can get their hands on them, leaving only fewer affordable options of housing in the Los Angeles area. Surprisingly, despite low housing inventory and increased prices, demand for houses did not remain an issue during the past few years.
However, such a hot market where houses remain on listings for only a short time and are being sold at a significantly higher price leads to the increasing problem of affordability. Today, we will learn about housing affordability and what that means for homebuyers.
Is affordability an issue for homebuyers in LA?
Undeniably, prices have increased and so has the demand for houses in LA. Before we talk about whether a homebuyer can afford a house in a hot LA real estate market, you must first understand what exactly housing affordability means for homebuyers.
For most homebuyers, housing affordability refers to what they can afford for their monthly mortgage payments. The main focus is not on the overall price of a property but the monthly mortgage payment.
Thus, during the past couple of years, despite increasing prices, buyers were able to afford more because interest rates had dropped to historic lows. The average monthly house payment was actually declining even when house prices were sky-rocketing from 2018 to 2020.
However, in 2021, the interest rates are rolling back to their optimum state and thus, have not been able to offset the increase in housing prices.
But, again, affordability is a complex issue. Just because housing rates or interest rates have gone up, it does not necessarily mean that the monthly mortgage payment will also increase at the same rate.
To better understand how interest rates and housing prices influence buyers’ affordability, here are two guidelines:
- The monthly house payment increases approx. 1% for each 1% increment in housing prices.
- The monthly house payment increases approx. 6.5% for each 0.5% increment in interest rates.
According to the quarterly report released by the Federal Housing Finance Agency, homebuyers witnessed a 12.6% increase in housing prices from Q1 of 2020 to Q1 of 2021. Even during the last quarter of 2020, house prices increased by 3.5%.
For around the last five to six years, millennials make up the largest group of homebuyers, as per the National Association of Realtors. This group heavily depends on mortgage financing and typically has smaller down payments. On top of that, this generation is known to have the second-highest amount of debt across the United States, which further restricts their purchasing power.
As a result, the increasing gap between levels of income and home values is presenting more challenges for millennials to afford homeownership in this new decade. However, when there are problems, solutions can be formed. Real estate builders can present a better housing plan that aligns with their buyers’ financing preferences and creates incentives to enhance housing affordability for millennials. By ensuring lower monthly payments and qualification requirements, the burden of affordability on new-age homebuyers can be eased up.