Since the beginning of 2021, the median family income has increased by 1.37%. In that same 3-year period, inflation has increased by 17.83%, with single-family housing prices increasing by 25.65%. This has caused an increase in the down payment required for a home and a surge in monthly mortgage payments.
When factoring in mortgage rates, the story does not look better. Mortgage rates have increased from 2.79% to 6.5%, with rates peaking in October 2023 at 7.7%. While this does not impact the down payment needed for a home, it greatly affects the monthly payment.
From 2021 to the end of 2023, monthly principal and interest rate payments increased from 13.3% ($1,011) of the household income to 24.5% ($2,033). These two factors make home buying much more difficult than it was just three years ago.
For example, the US Housing Affordability Index measures housing affordability. If the indicator is smaller than 100, then the average family cannot afford a typical house. For the first time since the early 1990s, the index was below 100 in May 2023 and did not rise above 100 until December.
The US is a big place and location has a significant impact on home prices. According to Federal Reserve Economic Data in November of 2023, the median US housing list price was $420,000; in California, the median house list price was $749,500; in Indiana, the median was $280,000. Compare that to November 2021 when the median US housing list price was $374,131 ($699,450 in California and $229,900 in Indiana). This shows that changing where you want to buy a house could significantly increase or decrease the viability of the purchase.
Not All Doom and Gloom
While this may seem concerning for people trying to buy a house, there is some good news. The US Housing Affordability index dropped near an historic low of 91.4 in October but reached 105.5 as of January 1, 2024, due to falling inflation and lower interest rates.
Those looking to buy a home might need to accept that they missed out on a great deal, but that does not mean buying a house is a bad idea. Even if prices don’t go back to where they were a couple of years ago, the average person can currently buy an average house. And, maybe affordability will improve, making future purchases even more attractive.
Conclusion
Buying a house can be a very worthwhile investment. With a concerted effort, I recently purchased a home within my budget. While the house needs improvements, I’m looking forward to moving in soon and beginning a life as a homeowner. Even with recent events making home buying more difficult than it was previously, it is still possible. If you are looking for a home, be optimistic and patient.
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