Affordability is the topic of this month’s Real Estate 101 Series question and answer session between Lane Hornung, CEO of 8z Real Estate and John Rebchook, of Denver Real Estate Watch.
Affordability. No other housing topic prompts more chatter, not only among house hunters and sellers, and their real estate brokers, but even around the water cooler in the office.
The Wall Street Journal recently had a front page article asking whether rising home prices would result in some high-priced markets running out of buyers.
Affordability is especially a hot topic in areas like Denver. Denver home prices have shown the biggest percentage gain from pre-recession levels of any of the 20 major markets tracked by Case-Shiller. At the end of July, homes in the Denver area were 6.8 percent less affordable than in July 2015, according to the Colorado Association of Realtors.
John: Lane, since this is a primer on affordability, let’s get basic. What exactly is housing affordability?
Lane: Affordability, effectively, is two things. Everyone thinks of the price of a home. That is one side of the equation. The other side is the ability to pay. That is whether it is coming up with a down payment, getting a mortgage, or making a full payment for a house. You have to be able to afford it.
John: Why are home prices rising so much faster than the inflation rate?
Lane: A lot of it is supply and demand. We have a tremendous shortage of homes to buy and demand remains strong. The other thing is that rental rates are also rising, so a lot of consumers realize they are better off owning than renting.
John: How do interest rates affect affordability?
Lane: Interest rates, at or near historically low levels, have kept affordability manageable to a degree. Markets would definitely be vulnerable to an increase in interest rates. That would significantly impact a large chunk of the buyer market.
John: How much of a rate increase do you think it would take?
Lane: Rates are so low that even if they rose by a full percentage point, I don’t think it would have a huge impact. If rates were to rise to 6, 7 or 8 percent, it would have an impact. But I don’t see that happening anytime soon.
John: So what can consumers do when they can no longer afford to buy the home they want?
Lane: In some cases, that means adjusting your expectations, such as buying a home in your second or third choice of location or resigning yourself to a longer commute. Some people will have little choice but to continue to rent.
John: Is there any good news?
Lane: We are seeing some income growth and employment growth. We are almost at what economists consider full employment.
John: Other good news?
Lane: A lot of people have significant equity in their homes. That allows them to sell their homes and buy a bigger home, or in some cases downsize, even in a rising market.
John: And the stock market has been setting records recently.
Lane: The stock market primarily impacts the luxury market. And the luxury market has been really strong lately.
John: Are you worried we are running out of buyers?
Lane: I am more concerned about sentiment changing. If all of a sudden there was a shift and people became nervous for other reasons, that could have a big impact on the market.
John: Building on that, does a correction in the housing market mean the sky is falling?
Lane: The thing to remember is that the market is somewhat self-correcting.If interest rates go up, prices would come down, and more people might step up to the plate and buy a home. If prices get too high and people stop buying, if you want to sell your home, you will have to adjust the price accordingly.