Boston condos for Sale
There’s a lot of discussion about affordability as Boston condo prices continue to appreciate rapidly. Even though the most recent index on affordability from the National Association of Realtors (NAR) shows homes are more affordable today than the historical average, some still have concerns about whether or not it’s truly affordable to buy a home right now.
When addressing this topic, there are various measures of affordability to consider. However, very few of the indexes compare the affordability of owning a home to renting one. In a paper just published by the Urban Institute, Homeownership Is Affordable Housing, author Mike Loftin examines whether it’s more affordable to buy or rent. Here are some of the highlights included.
1. Renters pay a higher percentage of their income toward their rental payment than homeowners pay toward their mortgage.
The report explains:
“When we look at the median housing expense ratio of all households, the typical homeowner household spends 16 percent of its income on housing while the typical renter household spends 26 percent. This is true, you might say, because people who own their own home must make more money than people who rent. But if we control for income, it is still more affordable to own a home than to rent housing, on average.”
2. Renters don’t have extra money to invest in other assets.
The report goes on to say:
“Buying a home is not a decision between investing in real estate versus investing in stocks, as financial advisers often claim. Instead, the home buying investment simply converts some portion of an existing expense (renting) into an investment in real estate.”
It explains that you still have a housing expense (rent payments) even if you don’t buy a home. You can’t live in your 401K, but you can transfer housing expenses to your real estate investment. A mortgage payment is forced savings; it goes toward building equity you will likely get back when you sell your home. There’s no return on your rent payments.
3. Your mortgage payment remains relatively the same over time. Your rent keeps going up.
The report also notes:
“Whereas renters are continuously vulnerable to cost increases, rising home prices do not affect homeowners. Nobody rebuys the same home every year. For the homeowner with a fixed-rate mortgage, monthly payments increase only if property taxes and property insurance costs increase. The principal and interest portion of the payment, the largest portion, is fixed. Meanwhile, the renter’s entire payment is subject to inflation.
Consequently, over time, the homeowner’s and renter’s differing trajectories produce starkly different economic outcomes. Homeownership’s major affordability benefit is that it stabilizes what is likely the homeowner’s biggest monthly expense, assuming a buyer has a fixed-rate mortgage, which most American homeowners do. The only portion of the homeowner’s housing expenses that can increase is taxes and insurance. The principal and interest portion stays the same for 30 years.”
4. If you want to own a home and can afford it, waiting could cost you.
As the report also indicates:
“We need to stop seeing housing as a reward for financial success and instead see it as a critical tool that can facilitate financial success. Affordable homeownership is not the capstone of economic well-being; it is the cornerstone.”
Homeownership is the first rung on the ladder of financial success for most households, as their home is most often their largest asset.
If the current headlines reporting a supposed drop-off in Boston real estate affordability are making you nervous, let’s connect to go over the real insights into our area.
Boston condos for Sale
With Boston real estate inventory for sale at an all-time low. Realtor.com just reported that there are 39% fewer homes for sale today than there were last year. At the same time, buyer demand remains strong. In a recent newsletter, research analyst Ivy Zelman explained:
“Although the headwind of severe supply constraints in most markets has contributed to slight moderation in seasonally-adjusted and year-over-year new pending contract growth for two consecutive months (albeit still growing strongly), the underlying strength of buyer demand, particularly for this time of year, remains apparent.”
Whenever there’s a shortage in the supply of an item that’s in high demand, the price of that item increases. That’s exactly what’s happening in the Boston real estate market right now. As a result, home values are surging.
This is great news if you’re planning to sell your house. On the other hand, as either a first-time or repeat buyer, this may instead seem like troubling news. Purchasers, however, should realize that the price of a house is not as important as the monthly cost. Here’s how it breaks down.
There are several factors that influence the cost of a home. Two of the major ones are:
- The price of the home
- The mortgage rate at which a buyer can borrow the funds necessary to purchase the home
The National Association of Realtors (NAR) produces a Housing Affordability Index which takes these factors into account and determines an overall affordability score for housing. According to NAR, the index:
“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”
Their methodology states:
“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”
So, the higher the index, the more affordable it is to purchase a home. Here’s a graph of the index going back to 1990:The blue bar represents today’s affordability. We can see that homes are more affordable now than they were from:
- 1990 to 2008
- 2017 to 2018
Buying a home today is just a little less affordable than it was last year, but still very affordable compared to historical housing market trends.
Note: During the housing crash from 2009 to 2015, distressed properties (foreclosures and short sales) dominated the market. Those properties were sold at large discounts not seen before in the housing market.
The number one factor impacting today’s homebuying affordability is record-low mortgage rates. There’s no doubt that prices are on the rise. However, mortgage rates have fallen dramatically. Last week, Freddie Mac announced that the average interest rate for a 30-year fixed-rate mortgage was 2.72%. Last year at this time, the average rate was 3.68%.
If you’re considering purchasing your first home or moving up to the one you’ve always hoped for, it’s important to understand how affordability plays into the overall cost of your home. With that in mind, buying while mortgage rates are as low as they are now may save you quite a bit of money over the life of your home loan.
At this point, home purchase affordability is still in a historically good place. However, we need to watch price increases going forward. As Mark Fleming, Chief Economist at First American, noted in a recent post: