Is it the worst time to buy a home? We look back at the last 22 years of home affordability to put the 2022 housing market into context.
With headlines sounding the alarm on rising home prices and mortgage rates, homebuyers may be led to believe the sky is falling.
Let’s be clear: home affordability is diminishing in 2022 as prices and mortgage rates rise. But two big sexy numbers don’t tell the entire story of today’s housing market, and a look at home affordability throughout the 21st century may make homebuyers feel better about today’s environment.
Our analysis of the last 22 years of homebuying data shows that while home prices are soaring to new heights, affordability is not in uncharted waters and today’s homebuyers are in some ways better off than homebuyers of the not-too-distant past.
The nature and beauty of the housing market is that homes appreciate on average 4-5% per year, slightly outpacing the rate of inflation. That’s what makes homeownership a primary source of wealth creation in the US.
But home prices are not the only thing that determine affordability. If they were, all but the wealthiest homebuyers would have been priced out of the market decades ago.
Affordability also relies on mortgage rates and wage growth. It’s measured by how much of their monthly income homeowners spend on their mortgage payments, also known as the front-end debt-to-income ratio.
The graph below shows the national average monthly mortgage payment for each year since 2000 and how much of the national median family income it required. A lower front-end DTI percentage represents a more affordable housing market.
Home affordability calculator: Crunch the numbers on your unique situation
After all of the hand wringing over soaring prices, mortgage rates, bidding wars, and vanishing inventory… 2021 was an extremely average year in terms of affordability.
In fact, it ranks exactly in the middle for the last 22 years.
On average, homebuyers locked in payments that were less than 27% of their monthly income – just below the conventionally recommended mark of 28%. And those that purchased early in the year saw their home values increase as much as 20% while their monthly payments stayed the same.
Last year’s housing market was record-setting in many ways, but in terms of affordability it was a total snoozefest to the benefit of homebuyers.
Based on mortgage rate and price growth forecasts from leading housing authorities, front-end DTI could climb over 30% by the end of 2022. However, that wouldn’t be the highest or even second highest mark in the last 20 years. In both 2006 and 2007, front-end DTI was over 31%.
But 2022 is not 2007. (And even if it were, here's why that's not the end of the world).
Most importantly, mortgage rates are substantially lower. In 2006 and 2007, the average 30-year mortgage rate was nearly 6.5%. Today, rates are in the mid-3’s and forecasted to average 3.83% by the end of the year.
Today’s homebuyers may be end up spending a similar share of their income on mortgage payments, but they’ll be buying more house, as shown below.
In the graph below, the green line showing median home prices is what headlines are squawking about. But the blue bars representing affordability are what homebuyers should focus on.
Yes, prices are through the roof, but affordability isn’t. Front-end DTI averaged 27.6% in 2021 and, based on forecasts, is projected to reach 30.3% by the end of 2022. That's a big leap, but there is a lot of middle ground between those two points.
In fact, in eight of the last 2022 years front-end DTI was between 27-30%, including 2016-2018. The difference is that today’s homebuyers are putting more cash toward their house and less toward interest payments.
When it comes to what matters most – an affordable monthly mortgage payment – now is not the worst time to buy a home. However, affordability is forecasted to decline throughout 2022 as home prices and mortgage rates continue to increase.
Homebuyers may be feeling sticker shock and anxiety over rising mortgage rates, but in the big picture, buying a home today is similar to the pre-pandemic years of 2016-2018 with one major difference: they’ll be putting less money toward interest and more toward their homes.