Money Talk
By Peter G. Miller
CTW Features
Question: If home prices keep going up and wages are stagnant, how can buyers afford to purchase?
Answer: You can pretty much guess that when it comes to money and real estate there are a lot of conflicting views. Here are some basic – and contrasting – facts.
First, you can say that incomes are rising. The Census Bureau says that “median household income was $56,516 in 2015, a 5.2 percent increase from the 2014 median in real terms.”
Second, you can say that incomes are falling. The Census Bureau says median income in 2015 was also “1.6 percent lower than the median in 2007, the year before the most recent recession.”
Third, you can say that incomes have been falling for a very long time. Despite the 5.2 percent bump in 2015, the Census Bureau says household incomes were “2.4 percent lower than the median household income peak that occurred in 1999.”
When it comes to home prices the picture looks like this:
You can say that home values are rising. The National Association of Realtors says that the median existing home value in September was $234,200, up 5.6 percent from a year earlier and the 55th consecutive month where home prices rose.
But one reason home prices have been rising for more than four years is that in 2012 home values were in a trough. Figures from the Federal Housing Finance Agency show that after the 2008 financial collapse home values dropped, reaching a low point in 2011. So, really, after falling into a financial ditch home values are now coming back.
Or, you could say that home values remain lower than they were in the past. For instance, the September S&P CoreLogic Case-Shiller Indices were “within 0.6 percent of the record high set in July 2006.” Translation: Home prices were higher in 2006.
The catch is that home prices and incomes are not the only major factor to consider. The unquestionable reality is that incomes go far further now because mortgage rates today are vastly better than in the past. Freddie Mac reports that typical mortgage rates in 1999 were at 7.44 percent versus 3.74 percent at the end of October.
Effectively, mortgage costs have been cut in half. This is a big deal because even small mortgage rate declines impact affordability. For instance, Freddie Mac says the principal and interest payments on a $250,000 mortgage at 4 percent are approximately equal to the payment on a $266,000 30-year fixed-rate mortgage at 3.5 percent.
In the end the numbers, the stats and the official pronouncements really don’t count. What does count is what you, as an individual, can comfortably afford. To get a realistic idea regarding affordability sit down with a local lender and get pre-approved for a mortgage. By “pre-approved” I mean let the lender look at your paperwork to come up with a realistic estimate of your borrowing power.
© CTW Features
Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.
