By Harold Copher, Jr. | Willow Bend Mortgage

Here we are in the final quarter of 2018. By all accounts, this was another excellent year for those of us in real estate. As we approach 2019, I’m starting to hear rumblings in the greater Austin metropolitan area about the topic of affordability. What about that?

Rising home prices and interest rates together will raise the cost of homeownership. Are wages increasing sufficiently to cover the increased cost? Let’s look at the numbers. Consider this hypothetical; take a home that sold for $310,000 in the summer of 2016. Assume the buyer financed an 80 percent loan at a competitive 3.50 percent interest rate for their 30-year mortgage. Our 2016 buyer invested $62,000 with a down payment and now has a $1,114 monthly principal and interest (P&I) payment.

If the home next door was exactly the same, and the neighborhood was appreciating at a steady 5 percent per year clip, the 2018 sales price for the house next door would be roughly $340,000. Our 2018 buyer also wants an 80 percent loan, which would require a $68,000 down payment. A very competitive summer 2018 interest rate is offered at 4.50 percent for the 30-year purchase mortgage. This scenario nets a $1,379 monthly P&I payment for our 2018 buyer.

If we assume annual property taxes and homeowners insurance remain the same, our 2018 buyer needs an additional $6,000 for down payment and the monthly payment increases by $265 for basically the same house. That’s a 9.7 percent increase in down payment and 23 percent increase in monthly principal and interest.

How much money would our 2018 buyer need to earn to have a comparable percentage of income invested in his monthly P&I payment? If our 2016 buyer were approved with $7,500 per month in qualifying income, the monthly P&I would foot out to roughly 15 percent of qualifying income. For the 2018 buyer to commit to a 15 percent monthly P&I, the monthly qualifying income would need to be $9,190. Wages would need to increase by 22 percent over this two-year period for our 2018 buyer to be similarly positioned as their 2016 counterpart.

Most reports are telling us that first-time homebuyers account for 30-40 percent of transactions nationally. That’s a healthy percentage. How much will rising interest rates and increasing home prices impact our client’s willingness or ability to buy a home?

Higher mortgage rates and increased values are facts of life today, but it is important to remember that the decision to buy a home is not influenced solely by interest rates. For many homebuyers, it is about fulfilling a lifelong dream, as well as sheltering loved ones and serving as an investment.
By definition, first-time homebuyers are typically moving from a rental property or housing provided by family members. That scenario makes our job a little easier. Having to factor in timelines for the sale of a current home and projecting the proceeds from that sale early in the process can add a little stress to our purchase transaction.

From a macro viewpoint, when you have a first-time homebuyer, you’re adding to the inventory problem. With the “move up buyer,” we’re helping mitigate the inventory problem. You’re adding a home to inventory and taking one away. Also, there is an opportunity to participate in two transactions — both the sale and the new purchase. Low inventory is a factor in our affordability discussion.

Low inventory and high demand will drive prices higher. I think most of the upcoming presentations and articles focusing on 2019 will agree that the inventory/demand circumstances are softening in our area, but not going away. From a mortgage perspective, most will agree interest rates will continue to trend up. Increased interest rates put pressure on the affordability calculation.

The good news for 2019: debt-to-income (DTI) ratio parameters on most programs have eased upward from the limits imposed immediately after the 2008 crash. This, along with increasing growth in the niche program offerings will allow more buyers opportunities to qualify. So long as our economy remains strong, I believe we’ll have the means to continue to fulfill the dream of homeownership next year. RL