When looking at buying a new home or investment property. Is It The Price Or Cost That Matters? there’s one thing for sure, there are plenty of variables when making your final decision. Is It The price Or Cost That Matters?
Home buying activity (demand) is up, and the number of available listings (supply) is down. When demand outpaces supply, prices appreciate. That’s why firms are beginning to increase their projections for home price appreciation going forward. As an example, CoreLogic increased its 12-month projection for home values from 4.5% to 5.6% over the last few months.
The reacceleration of home values will cause some to again voice concerns about affordability. Just last week, however, First American came out with a data analysis that explains how the price is not the only market factor that impacts affordability. They studied prices, mortgage rates, and wages from January through August of this year. Here are their findings:
“In January 2019, a family with the median household income in the U.S. could afford to buy a $373,900 house. By August, that home had appreciated to $395,000, an increase of $21,100.”
Mortgage Interest Rates
“The 0.85 percentage point drop in mortgage rates from January 2019 through August 2019 increased affordability by 9.7%. That translates to a $40,200 improvement in house-buying power in just eight months.”
“As rates have fallen in 2019, the economy has continued to perform well also, resulting in a tight labor market and wage growth. Wage growth pushes household incomes upward, which were 1.5% higher in August compared with January. The growth in household income increased consumer house-buying power by 1.5%, pushing house-buying power up an additional $5,600.”
When all three market factors are combined, purchasing power increased by $24,500, thus making home-buying more affordable, not less affordable. Here is a table that simply shows the data:
Is It The price Or Cost That Matters?
In the article, Mark Fleming, Chief Economist at First American, explained it best:
“Focusing on nominal house price changes alone as an indication of changing affordability, or even the relationship between nominal house price growth and income growth overlooks what matters more to potential buyers – surging house-buying power-driven by the dynamic duo of mortgage rates and income growth. And, we all know from experience, you buy what you can afford to pay per month.”
As previously stated there are many factors when making a decision to purchase Real Estate. Another area of concern would be property insurance. There are many areas in my state where a simple purchase on one side of the road may make a difference in the cost of insurance of thousands of dollars, or even getting covered.
The interesting thing is most cases is that a potential buyer will look at a property and say to themselves “I can get a great rate, my payment will be in a range that I can afford” without looking at the costs of insurance, PMI (mortgage insurance) taxes and the big one. Repairs and maintenance. I always have felt that if you are a renter and want to be a buyer. Look at purchasing a property with total expenses of 20% less than they would be if you were renting.
Here’s an example: let’s say that you have been renting for $1300 per month, Look at properties that would get you in a range of $1000 -$1100. This will give you a little cushion when your budget is hit with home repairs.
With all of these factors to consider. take your time and get the facts. All The Facts so that no matter what price you paid the cost of ownership won’t run you to the poor house. Again I ask, Is It the price or cost that matters?
For more on the cost of homeownership this article has a lot of great points.