Affordability Defined

I saw an interesting statistic last week I thought worth sharing.  I keep hearing about how continued price appreciation is making buying a home less and less affordable for the average homebuyer.  I certainly won’t argue the fact that it’s easier to buy something priced cheaper than something more expensive.  But I think the term “affordable” might need a little clarification in our concern about rising prices. 

Right now, prices are simply being driven by supply and demand – there is more demand than supply and that naturally drives prices up.  And while we may be feeling this a little more intensely right now here in Nashville, it is a common issue nationwide.  Pending home sales declined in March and April, meaning closing numbers in June/July will likely be lower as well.  But the issue is not a lack of buyers (or a willingness to pay the higher prices), it is simply a lower supply than what is needed (inventories are down 9% nationwide from a year ago).

But back to the statistic I found most interesting: if you go back to 2000 and 2006, the last two times prices seemed to get “unaffordable”, and you adjust prices for interest rates and increased average incomes, we are currently 9.3% lower than where we were in 2000 and a whopping 32.5% lower than the peak in July, 2006 from an affordability standpoint.  So while it does feel at times that prices are getting too high to be considered affordable, particularly in a few markets around town,  the reality is that with the current interest rate environment and the increase in wages over the last 10+ years, buying a house is quite a bit more affordable than the level reached in either of the last two periods of significant price increases.

So if anything, that should be an encouragement to our clients to get out there and buy now before rates go up and prices continue to climb.  But then we are back to the old supply/demand issue where there just isn’t enough supply to meet the demand – and that’s really the issue more so than homes being unaffordable.  I guess the other thing I would suggest at this point, and it probably goes against everything that is going on right now, is a simple reminder that real estate is a commodity – the prices will certainly go back down at some point.  Let’s not get caught thinking that because we are in the hottest market in the country that it will stay like this forever.