Affordability Is Not What It Appears To Be

People look at home price appreciation and assume that if home prices rise by 20% and median earnings only rise by 5%, we have a big drop in affordability. However, this is an illusion. If your monthly mortgage payment is $1,000 then a 20% increase in home prices will push that payment up by $200. If your monthly income was $4,000, then a 5% increase in earnings is also $200. So your 5% increase in earnings is enough to cover the extra $200 mortgage payment.

Admittedly your mortgage payment used to be 25% of your budget and it is now 28.6%, but to most people, this will not put them off buying a home, especially when they foresee their home equity increasing, making them wealthier over time. In fact, many homeowners in Greater Phoenix have been earning more from their homeownership than from their employment over the last 12 months.

There will be an impact on the down payment too, which may be more of a disincentive. However, we are seeing a proposal for a $15,000 tax credit for first-time homebuyers, which could offset this. In fact, we are concerned that a $15,000 tax credit could increase demand when the market already has more demand than it can handle. There are no obvious plans to increase supply, so market balance still seems to be a distant spot well over the horizon.

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We hope that 'proposal for a $15,000 tax credit for first-time home buyers' becomes a reality. 

Meanwhile, the above Cromford Daily Observation on the 'illusion' on home price affordability is instructive and worth having in your repertoire of information.

I keep pushing my access to the statewide 'bank grade' charts and graphs I can pull from my Collateral Analytics account. In particular, beyond the AVM (automated valuation model) the Intelligence Reports and 5-year Forecast. They are so timely.

That 5-year Forecast is based on a top-tier, proven algorithm that weighs heavily on 'affordability'. Here's the explanation they give:

The Core Based Statistical Area (CBSA) and Zip Code Forecast chart shows the historical and forecast median single family prices for the user selected zip code and surrounding metro. The price forecasts are based on models developed by Collateral Analytics and are driven primarily by employment growth and home price affordability which are the two most important factors in housing markets.

Here are some sample 5-Year Forecasts for select markets across our fair State:

Note: In smaller markets like Sedona and Prescott the program says it doesn't have sufficient data for those Forecasts. However, I haven't found a market yet where you couldn't run an Intelligence Report - a great market snapshot, with a builtin 2-year look back - a terrific marketing piece that can be easily scaled down to postcard size. 

Flagstaff ~ 

Phoenix ~ Note: In the greater Phoenix Metro you can generate 5-year Forecasts down to the zip code - including zips in Scottsdale (samples below), PV, Gilbert, Peoria, etc.

Scottsdale ~ showing 85254, 85255 and 85257. 85262 added 2nd graph below:

Scottsdale (85262) ~

Tucson ~ Note: You can generate 5-year Forecasts in important sub markets like Oro Valley (85737 shown 2nd graph below):

Oro Valley (85737) ~

Tubac (Nogales 85646) ~ 

I keep pointing to this reference because it is quasi-proprietary ie. no other agents in Arizona have it and or are using it.

And again, it's such a timely 'bank grade' resource for buyers concerned that they may be buying at the top of the market. An objective resource to mitigate this legitimate concern differentiates the RLSIR brand; and by extension, differentiates you!