Can I afford to buy a house today
Can I afford to buy a house today? This is a very common question that I get all the time. I’m going to talk about three factors that may affect whether you can buy a house today, next year, or in the next few months, or if you cannot buy. So let’s get right into it. Currently, in the USA, approximately 74% of households own their homes, and the affordability rate has been the lowest in decades. It used to be in California; it used to be under 20%. It may be much lower right now. And the affordability rate is getting lower and lower as the prices of homes, the interest rates, and everything else is going up. So let’s see the three factors that affect whether you can buy a house or not in today’s market and in the upcoming market. Of course, affordability is a big deal.
A lot of the Americans who want to buy a house have been knocked out of the housing market, but they still really want to buy. In the pre-epidemic levels, there was a huge shortage of homes, and the buyers who wanted to buy could not buy homes because the interest rates were so low. Even if they could afford or barely afforded a home, they were outbid by foreign buyers, cash buyers, investors, and other buyers with large down payments and large amounts of extra money who could easily qualify. So a lot of the buyers that were going to buy in the last two, three, or four years could not buy, even after trying and trying and trying. And now these challenges have come up.
So, the number one reason a buyer, perhaps like yourself or any other buyer, could not buy a house today or at any other time is because of current housing mortgage rates. As of a few days ago, the rates were almost 7.25%. My daughter bought a house a couple of years ago for under 3%, so she could qualify. A lot of the buyers I know and the homes I actually sold were between 5% and 8%. I’ve also sold homes at 3%, 4%, and 5%. But just in the last year, in the last eight or nine months, mortgage rates have jumped by almost 3.83% or 1 point, which is very high. I had three buyers. They were looking very excited. We made offers back in July, August, and September, but when the rates really jumped, they were totally knocked out of the market. They could barely afford a $600,000 condo in Orange County, California. Now they can only qualify for a 500- to 550-square-foot condo or townhome, for which there’s nothing. So they just stopped buying. The other dilemma is that because they cannot buy, all three of them ended up renting, and they’re paying a ridiculous amount of rent. So the rent goes hand in hand with the home prices. The higher the price of a home, the higher the mortgage rate, and the higher the rent. Because the people who own these homes want to make sure they break even, they charge the renters higher rent so they can do so. So, yes, it is a dilemma. The number one thing that turns away buyers is the interest rate. And right now, a lot of buyers have been knocked out.
The second factor that comes into play when you want to buy a house is the actual home price, regardless of the mortgage rate. And as we know, over the last four or five years, rates have gone up five to 10% per year, not total, which is typical in a normal market. They go up 10% or 15% over the last three, four, or five years, but in the last two or three years, they’ve gone up as high as 40%. I remember selling a house for $715 in 2016, and I have the same townhouse in Irvine listed right now for $1.2 million. Amazing. Great for the seller, not good for the buyer, because the 715 condo is going for one and two. It’s not going to sell at 1.2 because it’s been on the market for three weeks. We’ve had open houses, we’ve advertised on social media, and we’re not getting a lot of traction. Of course, one of the reasons is that the high-interest rate jump has scared off a lot of buyers, so they have just backed off looking at all. So the traffic is very low. And of course, we’re entering the Thanksgiving and Christmas seasons. So the typical home-buying frenzy or activity slows down anyway. So not just on my listing, but when I talk to other agents, local and nationwide, we’ve noticed that the traffic is down. When it comes to showing homes from agents, traffic at open houses is significantly lower. Buyers are just not coming in. There used to be hardly any open houses. If there was an open house, it used to be from twelve to two or one to three, and we used to have 50, 60, or 70 people come in in the two or three hour period. Now we’re having open houses, at least in Orange County. I’m not sure about the other states. We’re having an open house. And the average number of groups that come in is anywhere from four to five to seven groups per day on Saturday and Sunday. So that shows a significant slowdown in buyer traffic. and one reason is the home prices. Buyers are just tired of not paying home prices that high, and with the high interest rate, they just said, “We’re going to hold off,” and that’s what’s happening. Hopefully, interest rates will fall and inflation will fall. We will see an increase in home purchases by spring, and the market may return to normal, because there hasn’t been much activity in the last two or three weeks. And there’s a lot of rain today, so of course nothing’s going to happen today. But in general, home buying activity has significantly slowed down, which means that the home price will have to come down. And with the home prices coming down and the mortgage coming down, you will be closer to being able to afford a home. So I hope that happens for you sooner than later. If you’re a buyer, the third thing affecting your affordability or your ability to buy a house is your wages. The good news amongst all these bad news stories is that, according to the Bureau of Labor Statistics, wages have increased by almost 7% from a year ago. Of course, wages haven’t kept up with inflation or home prices going up, but at least wages have gone up by almost 7% nationwide. So the other factor is, how much is your salary? What is the combined income of you and your spouse, or if you’re buying as siblings, father and daughter, or father and son, or any other way you buy? As a result, the more you earn, the more qualifications you have. So if you make more money, if you put a little bit more down payment, and if the price is stabilized and the interest rates go down, you will be able to afford a home. So this may be a great time to start talking to a lender, even though you’re not going to buy it for the next six months or next year at least. You know how much your income needs to be with the projected interest rate, so you know how much of a house you can afford. And on top of that, you will find out how much of a down payment you are going to need to buy the house. Are you going to put 3.5% down with an FHA loan? It’s a government loan. Are you going to put 5% down? Are you going to put 20% down? In Orange County, California, where I am from, a medium-sized house is currently worth nearly a million dollars. So if you put 20% down, that’s $200,000 that you’re going to need. That means you will have to qualify, or you will need to qualify to buy an $800,000 loan amount.So are your wages up to par? Can you get a variable interest rate or an interest-only variable rate? As a result of all of these factors, wages are high. Hopefully, your wage and salary are both increasing. If you’re self-employed, then hopefully your income is increasing as well. But these are the three factors that most affect your ability to buy a house today. And of course, as the rates drop, the prices drop, and more homes come on the market, you will be able to buy a house. The other factor that is affecting the home price is not dropping as much. A lot of the buyers call me up and say, “Find me a foreclosure, find me a deal.” There are no foreclosures right now. There’s no good deal right now. And the prices are not dropping despite the low homebuyer traffic, the high prices, and the high inflation, and that’s because there is still a historic shortage of homes. Not only did we have a shortage of homes during the pandemic, but now that the pandemic is officially over, we still have a shortage. And the other factor that may increase the shortage of homes coming on the market is if I’m a seller. Let’s say I bought a house three years ago at 4.5% and I want to move up a house. Or I want to move out of state, then the first thing I’m going to think is, “Why would I sell my 4.5% fixed rate house and go into a house that I’m going to pay seven and a half percent?” My mortgage is going to be way too high, and I may not be able to afford the home. So as a seller, I may not put it on the market and sell, and that is going to add to the shortage of homes and keep the prices from dropping significantly. And that’s why what we are seeing is that home prices are dropping gradually and not significantly. Good luck to you on home buying!