If you’ve read the headlines recently, you’ve probably seen the concerning news that housing has been at its least affordable since 1989. That means that not only has the cost of owning a home increased but it’s become increasingly harder for the average family to purchase a home. While obtaining a real estate mortgage in Chester isn’t by itself difficult, it is becoming harder for middle and lower-income households to find affordable homes.

There are a variety of factors that affect housing affordability, but really three key ones that dictate the affordability of homes — wages, housing prices, and interest rates.

Wages

Wages play a big factor in the increasing housing affordability issues we’re facing. Your income is the single most important factor in dictating how much you of a mortgage payment you can afford. And while housing prices have shot up over the last 2 years thanks to a COVID-fueled market, wages have remained relatively flat in comparison.

In 2021, the average household income was $79,000. That is an increase of only $500 from the 202 median income of $78,500. This growth, though, doesn’t compare to the rate the 45% housing prices have increased since 2019, according to Redfin. Since income has remained relatively flat while housing prices have soared, many families have been priced out of buying a house, especially across popular markets and major cities. While wages have slowly increased for the traditional white-collar worker, hourly employees have struggled to keep up with the increase in prices. It’s estimated that hourly workers will need to make $25 an hour to afford a two-bedroom rental home in the U.S. Meanwhile, the Federal minimum wage is only $11.25, emphasizing the gap many workers are struggling with.

When you get approved for a real estate mortgage in Chester or elsewhere, experts recommend that you don’t spend more than 30% of your income on a mortgage payment. Following this rule ensures that you have enough funds for other life expenses and aren’t “house poor.” The median household income in Pennsylvania in 2020 was around $63,000, which would equate to about a $1,500 mortgage or rent payment with the 30% rule. This severely limits the ability of many to afford a home, given the current housing prices.

Until wages increase at the same rate as housing, this gap will persist, with low and middle-income families being most affected.

Home Prices

It’s no secret that home prices have increased over the last two years. This increase has been dramatic compared to years past, with home prices jumping 20% year over year in 2022 according to CoreLogic’s Home Price Insights study. Of course, the more expensive homes are, the less affordable they become.

While housing naturally appreciates every year, this recent surge in pricing can be attributed to the basic business principle of supply and demand. There is an extreme shortage of homes for sale compared to the number of people wanting to buy homes, with some estimates calculating an astonishing 3.8 million homes needed to satisfy demand.

Unfortunately, it will take years for the housing supply to catch up to the demand. With construction costs increasing 19% yearly, home builders also feel the effects of rising prices. New homes are slowly being built but not at the pace needed to catch up to the buyer demand. The limited number of homes for sale has been driving a frenzy of buyers trying to secure a home, especially as Millenials – the largest generation ever – enter the market. Plus, remote work has pushed urban-dwelling professionals to more rural and suburban areas where the cost of living is more manageable.

There might be some good news on the horizon, though, as economists predict the drastic price appreciation of home prices will slow to a more normal rate of around 5%. This is in part because of the Feds efforts to slow inflation and improve consumer prices. With a more normalized rate of growth, housing prices are expected to level out as well. This doesn’t mean buying a home will become more affordable, but it will slow the appreciation to a pre-COVID rate.

Interest Rates

When mortgage rates increase, so does the price it cost to borrow money. Unless you’re paying all cash for a house, your interest rate when you get a mortgage will have a huge factor in how much your monthly payments are over the course of the loan. While many homebuyers were able to take advantage of historically low-interest rates in 2020 and 2021, those days are unfortunately over as rates increase. The Feds have signaled they might continue to raise rates to curb inflation, which will continue to exacerbate housing affordability.

Even a 1% increase in your interest rate can equate to hundreds of dollars more every month a homebuyer will have to pay. Throughout a 30-year loan on a $200,000, a 1% rate increase means paying $30,000 more in interest. As interest rates increase, many families will be priced out of buying a home. The higher the interest rate is, the less money you can get approved to borrow, and the higher your monthly payments will be.

While the current interest rate at 5% may seem high compared to the 3% rates many got in 2021, they are still low compared to the historical average. Since 1971, 30-year mortgage rates have averaged just under 8%, providing some perspective that it is still a good time to buy a home. Make sure you seek expert advice from a trusted professional on what kind of rates to expect when buying a home. The pre-approval process can give insight into what you can afford and how changing interest rates will affect your monthly payments.

While owning a home is becoming less and less affordable, there are still ways to save money when buying a home. To get a real estate mortgage in Chester, you need an expert team who can guide you through the process, ensuring you get the best rates and dedicated support.