Rent Vs. Buy 2021 – Is Housing Still Affordable?

Housing Affordability

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RENT VS BUY in 2021…Is housing still affordable? We are a month into 2021 and we are already seeing a robust real estate market here in central Maryland, as well as in many parts of the country. As we watched home prices increase in 2020, many are asking if housing is still affordable.

Is 2021 your year to buy a home? Are you wondering if it is a good year to by, after all? Usually, the answer is based both on economics, and on your personal situation. There are a lot of considerations, so it’s not an easy yes or no. But we get it, it’s an important question for first-time buyers.

First, let’s talk about math…affordability. What exactly does the term “Affordability” mean?

The National Association of Home Builders (NAHB) and Wells Fargo have been calculating the Housing Opportunity Index (HOI) for more than 30 years. They release quarterly surveys about two things: income and housing cost. The survey covers 237 metropolitan areas across the U.S. as well as the national averages.

According to the latest HOI survey released in Nov. 2020, housing affordability has changed since last year. Covid-19 and the many shutdowns have had an impact on just about every area of our lives, so of course housing has been affected.

In all, 58.3 percent of new and existing homes sold between the beginning of July and end of September were affordable to families earning an adjusted U.S. median income of $72,900. This is down from the 59.6 percent of homes sold in the second quarter of 2020 that were affordable to median-income earners and the lowest reading since the fourth quarter of 2018.

This means that 58.3% of Americans can afford to buy a median-priced home. The median income in America is $72,900. There is a median home price…but it really doesn’t matter. Local prices are what matters to your ability to purchase a home. More on that below.

Affordability has gone down since last year in most metropolitan areas, mostly due to increasing home values. Lower interest rates offset that increase to a great degree.

New homes have seen the highest price increases. NAHB sites the shortage and rising costs of lumber, and the shortage of skilled workers as the two issues most affecting the cost of building. Lumber availability has been severely affected by the pandemic.

This is an important perspective from NAHB:

Amidst the current recession spurred by the coronavirus pandemic, the housing industry is one of the few bright spots, due to low inventory, low interest rates, and pent up demand. The industry is poised to lead the economy back to strength.

How is the HOI calculated?

The housing cost calculation takes into consideration the price of homes and the interest rate. Today’s below-3% rates have made a huge impact on housing affordability. Mortgage rates are the lowest they have ever been.

“The average 30-year fixed-rate mortgage hit record lows 16 times in 2020. Then in January we saw another record low of 2.65%, the lowest level in its nearly 50-year history.

Just to put this in perspective…Only two year ago rates were 4.5%. In the 80’s rates were in the double digits, going as high as 18%. In the 90’s rates bumped up and down between 7% and 9.5%. (our first mortgage was 8.something%!) During the 2000’s we saw 5% and 6% regularly, and we thought it was incredibly low! Some said even too low, fueling the wrong kind of investment. The last decade saw many record lows as rates hovered around 4% for most of the decade.

To understand the impact of interest rates on affordability, read this handy chart: Interest Rates and Home Affordability.

For income, NAHB uses the annual median family income estimates published by the Department of Housing and Urban Development. They use the figure of 28% of gross income as an average amount that homebuyers can afford to spend on housing.

Divide the 28% of average income by 12 to come up with a monthly amount allowable for a mortgage. This is a much more conservative percentage than most lenders use.

Keep in mind that the FHA guideline maximum debt to income ratio is 56.9% with compensating factors. Lenders can, and most lenders will, limit maximum debt-to-income to under 55% and some lenders to 45%.

So, affordability calculations are much more conservative than reality. We can truthfully estimate that housing affordability is higher than the HOI reports.

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Rent vs buy – explaining housing affordability in Frederick Md

When explaining housing affordability, remember that local markets are different. While the National Affordability Index is at 58.3%, that’s not helpful to anyone in their particular location… local markets vary.

Washington DC, NVA, MD HOI

Frederick is a sub-market of Washington D.C., yet much more affordable. Washington D.C. has an affordability index of 63.6%. The median family income for the area is $$110,300, the median home price is $450,000.

Frederick MD HOI

The median income for Frederick Md households is $91,999, according to DataUSA, which uses a broad group of sources, and the median home price in Frederick is $323,600. Incidentally, without an exact number, I’m willing to guess that the affordability index for Frederick is higher than Washington D.C., Rockville and Bethesda, primarily because of home values.

Hagerstown-Martinsburg MD-WV HOI is 76.4%. The median home price is $235,000; the household income is $67,800.

Incidentally, the MOST affordable area is Cumberland Maryland, where 96.2% of households (with an average income of $57,500) can afford the median-priced home of $119,000.

You can probably guess the LEAST affordable Metropolitan area in the country…San Francisco has an HOI of 9%, with a median family income of 130,900 and a median home value of $1,410,000.

🔎SEARCH for Homes in Central Maryland

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Rent Vs. Buy in Frederick Md – Some History

Buying a home is not for everyone all the time; sometimes it’s a good idea for a particular time, sometimes it’s a good idea to wait, and sometimes people shouldn’t buy a home. Here are some facts and statistics to help you decide when it’s the right time to buy or rent.

Whether to rent or buy a home is a personal choice, based on a lot of variables. Sometimes it involves more than just numbers.

Home values were declining from 2006 until the summer of 2012.  The first 2 years of decline in home prices were in the double digits, but the next 2 years slowed to less than a 5% decline. Then we saw the leveling off of home values here in Frederick County, and since 2014, we’re experiencing increases in the area. Homes above $600K are increasing at a slower pace than homes priced under $400K. It’s still a bi-furcated market.

Should I Rent or Buy?

Given the fact that Frederick County is very affordable, compared to metropolitan areas nearby, and given the fact that home values are on the rise, let’s establish that it is generally a good time to get into homeownership. The real questions you must answer are about your personal situation.

For some people, buying a home makes the most sense, and for others, renting is best. It is a well-known fact that for most Americans, owning a home is the main vehicle for building wealth over time. You have to live somewhere, right? When you are paying rent, you are paying someone else’s mortgage.

Here are six questions to help you determine if 2021 is the right time for YOU to buy. Note:  Some of the answers might surprise you so read on…

1. Do you have some savings?

Even though there are a number of zero down payment programs, you must plan for closing costs and many other one-time expenses as a homeowner. Insufficient savings may not prevent you from buying a home but it is a strong indication that you may not be prepared for the ongoing financial requirements of homeownership.

How much should you have saved? It depends on what price range you are considering, as well as the loan you will be using.

With an FHA financed loan, you will need to have 3.5% for a down payment. On a $325,000 home that is $11,375.

For most first-time buyers, FHA loans are a great choice, with low-downpayment and common sense qualification criteria. But there are also conventional loans and VA loans to consider. The downpayments will vary with each loan and each lender.

The Maryland Mortgage Program is a great loan program for first-time buyers (and repeat buyers) in Maryland. The program offers several types of down-payment assistance. As with most state programs, there is an income limit with MMP, which is up yo $176,400 (depending on household size and targeted area) for Frederick County. The mortgage rates are very competitive with other loan programs. Be sure to read the details in the linked article, and contact us for an MMP qualified lender.

You will have some other expenses, like the home inspection, typically $500 to $600.

You may have some closing costs, like origination fees, and fees from the title company, typically 2% to 3% of the purchase price. Sometimes buyers can negotiate with the seller to pay closing costs, but its best to be prepared.

Recommended Reading:

How much do you need for a downpayment on a home? Bill Gassett, MA Real Estate Agent, has an informative article explaining downpayments and gives several pros and cons for the size of your downpayment. He’s got several suggestions for coming up with a downpayment.

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2. Are you Creditworthy?

Your credit score is an important asset. Your lender will consider your score as an indication of your creditworthiness. Typically, the higher the score, the lower your interest rate.

Additionally, your credit history is important. While you can always find a lender to lend you money, you’ll pay exorbitantly high rates. Solid lenders are more skeptical if your credit history is not good.

Minimum Scores. While FHA and Freddie and Fannie have minimum scores, (A minimum of 580 is necessary to make the minimum down payment of 3.5%.) many lenders have their own requirements. (FICO credit scores start at 300 and go up to 850.) Most lenders require a score of 620 to 640 to qualify.

The higher your credit score, the lower the risk you are. The lower the risk you are, the lower your interest rate. Shoot for a high credit score, not a minimum score.

Recommended Reading:

How to Build A Credit Score Lenders will Love

3. Is your employment steady?

While we can never predict the future, you probably have a sense of your job or business security. If you’re working for a start-up company, you probably want to wait for a secure situation. The last thing you want is to saddle up with a mortgage and then find yourself unemployed, or underemployed.

3. How much debt do you have?

A lender will calculate your debt-to-income ratio, which is different for each loan product. Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income.  A conservative number to shoot for is having a mortgage that is 28% of your income. This is called the front-end ratio.

Most mortgages have a maximum back-end debt-to-income (DTI) ratio of 43%. The back-end ratio takes all your debt into account. There are some programs with higher front-end and back-end DTI ratios…which make us nervous, to tell the truth.

You can do a quick calculation and decide how you fare in the category of debt. To calculate your debt-to-income ratio, add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is the amount of money you have earned before your taxes and other deductions are taken out.

If you are thinking about a home purchase you’ll want to plan ahead to minimize your debt. You’ll want to consider foregoing a new car purchase, or charging the new furniture on you credit card. You might want to pay down your credit cards and pay off some debts.

This is why we like to say: Buying a home is a process, not an event.

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Recommended Reading:

Joy Boylan has written a concise and helpful guide for young adults preparing to purchase their first home. There is a lot of preparation for a home purchase, and thinking long-term is a great start.

5. Are you going to be around for a while?

Again, we can’t tell the future, but you’ll want to be sure that you can stay in your home for a minimum of five years. If you expect to get a job transfer within a few years, you may end up paying money in order to sell it. You’ll want to make sure your home value increases enough to cover the costs to sell your home.

The length of time that it will take to cover those costs depends on various economic factors in your area. Currently, in Maryland, we’re seeing an average of 4-5% appreciation per year. This is considered normal and healthy and should cover selling costs in about five years, given normal conditions.

If the area you buy your home in experiences an economic upturn, the length of the time to cover these costs could be shortened, and in the unfortunate circumstance of an economic downturn, the opposite is also true.

6. How long will the home meet your needs?

What features do you require in a home to satisfy your lifestyle now? Five years from now? Depending on how long you plan to stay in your home, you’ll want to make sure that the home has the amenities that you’ll need.

For example, a two-bedroom home may be perfect for a young couple with no children. However, if they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow.

If the home has room to grow, consider the costs or your ability to DIY. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you’ll need will help you find a home that will satisfy you for years to come.

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7. Are you ready for the responsibility of homeownership?

There are costs and responsibilities with homeownership that most renters are not accustomed to, things the landlord took care of. Home insurance, home maintenance and repair, appliance replacement, and home maintenance and repairs are all important considerations. Most experts suggest you save 1% of your home’s value every year. Saving for long-term projects, like replacing the roof or the HVAC system, will save you the emergency of the cost of replacement when there is a sudden breakdown of a major system, or the inevitable replacement because of age.

Your home is probably the most expensive purchase you will make in your lifetime. It is a place to build your nest, both figuratively and literally…your financial nest egg. You will want to take care of the maintenance of your home regularly to maintain its best value throughout the years you own it.

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? Have you saved money by putting off your home purchase?

Even though home prices are rising, the cost of buying is still low. Interest rates are the major factor in the cost of a home. Look how the changing interest rate affects the monthly mortgage:

Recommended Reading:

Eric Jeanette, over at Dream Home Financing, has some great advice on how to find the lowest mortgage rate. With so many internet lenders and options, the information can be confusing especially when you start to compare the various fees.

Is This the Right Time to Buy a Home in Central Maryland?

Once you have crunched all the numbers, considered your financials and future employment, the decision is really about lifestyle. For most Americans home ownership is the most likely method to build wealth.

It is also a way to create a lifestyle that best suits you and your family. Those intrinsic desires are best accomplished in your own home…paint the walls the way you want, plant a garden, get a swing set, and enjoy the freedom to build a nest, both financially and emotionally.

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Chris Highland, Broker eXp Realty Maryland
Cell:  301-401-5119  Broker:  888-860-7369

Rent vs buy – explaining housing affordability, written by Chris Highland, Associate Broker, eXp Realty. We hope it helps with your homebuying plans!

Our real estate team has spent 28 years helping people in Frederick County and the surrounding area in Central Maryland determine if homeownership is right for them.

If 2021 is your year, give us a call and we’ll help you find your nest. Contact us for our preferred list of lenders. We can find a loan program that fits your situation.

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