Rising home prices are a good sign of a recovering housing market, but not all increases are happy ones. It’s true that these higher home prices help homeowners that were underwater before gain more equity and enhance their wealth. Those with more equity are likely to start small businesses or invest, moving up the economic ladder. However, the bad news is most incomes have not kept up with the housing rate increases. Unemployment has dropped from 10% to just over 5% from October in 2009 till today, but the wage growth has only grown 2.2% over the last year. This makes it difficult for new homebuyers to enter the market, particularly first-time homebuyers and borderline borrowers.
Home prices have recovered unevenly across the housing spectrum in this country. According to chief economists, “homes in the bottom third of the market appreciate faster on an annual basis than those on the top.” Low-income households dedicate $.26 of every dollar earned on a mortgage for a bottom tier home; however, high-income households spend $.12 on the dollar on a mortgage for a high-end home. [Source]
Here in Texas prices are increasing rapidly but not as fast as in places such as San Francisco where home buyers and homeowners are feeling the pressure. If mortgage rates continue to rise above 5%, residents may have to dedicate up to 50% of their income towards a mortgage payment. Less than 30% is considered “affordable housing, ” but it’s more like 37% to 41% for the typical homeowner. The 50% mark is just too much to sustain long-term. ( Very few lenders can or will lend on a home if the mortgage is 50% of a buyers income).
It shouldn’t be too much longer before rates rise above 5% and because home prices are increasing as well, it may be more difficult for first-time homebuyers to enter the market. There are, however, many different programs and options for first-time homebuyers or even distressed borrowers that may have faced foreclosure or short sale in the past.
If you’re interested in learning more about your options or ready to make the step to homeownership, please contact me at any time. We can go over all of your income, debts, and liabilities to determine the right program and how much home you can afford.