Friends and Clients —

Some potentially worrying news came out this month:

Home affordability is shrinking rapidly, according to research by Arch Mortgage Insurance.

In the first quarter, affordability (defined as the size of the monthly mortgage payment needed to buy a home) dropped by 5%. This was mainly due to the increase in mortgage rates, and, to a lesser extent,  an increase in home prices.

As a consequence, more people are now stretched and taking on greater debt relative to their income. Other buyers are being pushed out of the market altogether.

And that’s not all. Affordability is expected to drop another 15% to 20% by the end of the year. That’s because home prices continue to rise, and the Federal Reserve is expected to ratchet up its reference interest rate, which often leads mortgage rates, three more times this year.

What does this mean for you?

Well, if you’re looking to sell, you won’t have a hard time finding a buyer. Even with decreasing affordability, demand for homes still far exceeds supply.

However, it’s certain that buyers will look to take advantage of current conditions before affordability drops further.

That means that this spring and summer might see an additional rush on the real estate market. It also means that right now might be a very good time to list your home if you’ve been thinking about selling for a while.

On the other hand, if you are thinking of buying a home, you might think news spells doom for you.

However, there’s no need to panic.

While affordability is dropping, it is still well above historical averages (just like current mortgage rates). In fact, Arch Mortgage Insurance estimates that homes are now 15% to 20% more affordable than they have been in the period from 1987 to 2004.

At the same time, it’s certainly true that mortgage rates are going up, and this will affect what your monthly payments will be on a new home. From this perspective, it makes sense to move now in case you’ve been looking to buy before rates rise further.

So what’s the next step?

If you are thinking of selling, you can get started by finding out what your home might be worth in the current environment.  And if you are thinking about buying, you can get started by speaking with your lender and assessing what you can comfortably afford.