Over the past few days, there have been numerous headlines stating that housing affordability is in a serious free fall. Of course, you have to understand what that is in order to understand how these changes could affect you. After all, home affordability is a complex equation that is tied to many factors such as income, home values, rental prices, and mortgage rates.
What’s The Problem Here?
There aren’t that many homes currently on the market and in some places, there is an actual housing shortage. Prices are subsequently on the rise, with a 2 to 6% increase in home cost predicted over the next few years. Furthermore, companies aren’t building houses as fast as they did before the bottom fell out of market ten years ago. However, the improvement in the economy has led to an increased demand for better places to live.
The problem is, people’s salaries aren’t keeping pace with housing or rental costs. This has led to decreases in overall housing affordability. Mortgages are subsequently skyrocketing. They are scheduled to go up a total of 15 to 20% in the next year, with a 5% increase to take place over the next month. In some metropolitan areas (Tacoma, Boston, and Baltimore), price values will rise even higher.
Given these rapidly rising costs, people who want to buy a new home have a limited window of opportunity to do so. But the competition for properties will be fierce. As a result, new home buyers may end up spending more than is financially advisable in order to have their bid accepted.
Accommodations Costs — No Good Alternative
An increasing number of people are spending large chunks of their salaries on their mortgages. However, the United States government and the National Association of Realtors state that you should only be spending 25 to 30% of your salary on housing costs. It seems likely that financially savvy people will choose to stay put in the coming year and/or improve their existent properties rather than purchase new ones.
Other individuals may end up overreaching their budgets to keep a roof over their head if they aren’t having trouble doing that already. Although purchasing a house is still somewhat cheaper than renting one in most places, these spots are decreasing at a rapid rate. The cost of renting property in large urban areas is significantly less than owning it and a sizable majority of the American population now lives in areas where renting a home is the cheapest option.
Is There Hope?
Economists warn that housing affordability isn’t a "bubble" situation that will quickly reverse itself in the near future. But there may still be some good news. The rapidly escalating prices in places where current home prices greatly exceed their actual value should eventually slow down and reach an equilibrium.
This is particularly true if the local economy sours and job opportunities in the area decline in availability. Of course, the homes that people are buying are still more likely to increase in value over time, particularly those located in popular metropolitan areas.
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