Seems like a simple question. Here’s an article which discusses this question in some detail (Affordability). In reading the article, I found that some prominent people in the mortgage and real estate industry have quite different views. It seems to me that it should be a basic rule of economics; Supply vs. Demand.
If there are more homes for sale than buyers to buy them, home prices would decline. On the other hand, if there is a shortage of homes on the market and more qualified consumers wanting to buy them, homes prices would increase. Pretty simple, eh? Then, why does it seem so complicated?
Some say that housing drives the economy; up or down. As goes the housing market, so goes the economy. But, it seems for now we have a reversal. The economy may be driving housing. Which way I’m not sure.
With low rates for such a long time, many who own a home have refinanced to either restructure their debt, take out some equity to cover other expenses or both. The result is that many owners just stay put.
In most cases, this takes these homes off the market. Fewer homes to sell; higher prices. Although the homes these consumers own increase in value, the homes they may wish to buy to move up also increase in price proportionately, making it more difficult for them to afford the move. Result is: fewer move up buyers.
With fewer move-up buyers, we need to attract more new buyers into the market. Unfortunately due to a tough economy, low job growth, stagnant wages, and increased student debt, those who would normally be entering the job market are not with the same numbers as in the past. That would seem to result in decreased demand which should lower home prices. However, we are being told that home values are on the rise. How can that be?
I think it means that if the economy improves (as they say it is) as a natural order of things, the costs of goods and services will rise. As the economy improves more people should be able to afford to buy homes. As they do, the prices of homes will gradually increase depending upon the supply of homes for sale.
It’s not rocket science; if there is one home for sale in a desirable area and 10 people want to buy in that area the value of that home will go up. On the other hand, if there 100 homes in an area and only 10 people are interested, the value of those homes will decline. So, as is the case in most real estate transactions, it’s also “location, location, location.” There is more.
A number of variables go into the equation when trying to determine if homes are affordable. It’s “supply vs. demand”, in a specific area (location), on a certain type property (e.g. condos), at various price levels, with available financing, and qualified buyers, etc. Maybe it is rocket science, after all.
For homes to be affordable the keys are a stable economy, with good job and income growth, available decent housing stock at all levels (entry, move-up, luxury and McMansions), buyers who can qualify to buy and maintain these homes, with adequate financing vehicles.
It’s a delicate balance…supply vs. demand; or is it, demand vs. supply? Think about it