In recent years, many individuals have faced challenges when it comes to purchasing a home. However, the tides are beginning to turn, as there are indications that housing affordability is gradually easing up. This is indeed encouraging news, as highlighted by Lawrence Yun, Chief Economist at the National Association of Realtors (NAR): "The housing affordability has been seeing slight improvements, but it's definitely moving in the right direction."

The three significant factors influencing home affordability, namely mortgage rates, home prices, and wages, are explored here.

1. Mortgage Rates

Despite the volatility of mortgage rates this year, fluctuating within the mid-6% to low 7% range, there's a silver lining. Data from Freddie Mac reveals an overall downward trend since May (refer to the graph below):

The recent improvement in mortgage rates is partially due to the latest economic, employment, and inflation data. In the future, we may still see some rate volatility, but if the economic data continues to show signs of cooling down, experts predict that mortgage rates could continue to decrease.

A minor drop can significantly impact your affordability. Lower rates mean lower monthly payments, making your dream home more affordable. However, don’t expect them to decrease to 3%.

2. Home Prices

The second factor to consider is home prices. Although they are still rising nationally this year, the rate of increase has slowed compared to a few years ago. The graph below, using home price data from Case-Shiller, illustrates this:

For prospective homebuyers, slower price growth is a positive sign. With the pandemic causing a surge in home prices, purchasing a home became a challenge for many. Now, the slower pace of price increase is making homeownership seem more attainable. As Odeta Kushi, Deputy Chief Economist at First American, suggests:

"Although housing affordability remains a hurdle for potential first-time homebuyers, slowing price appreciation combined with lower mortgage rates could make the dream of homeownership more achievable."

3. Wages

The final factor contributing to improved affordability is the rise in wages. The graph below, using data from the Bureau of Labor Statistics (BLS), demonstrates the wage increase trend over time:

The blue dotted line indicates the typical annual wage increase. The right side of the graph reveals wages are rising faster than usual currently, indicated by the green line.

An increase in income can make homeownership more feasible as you'll have to dedicate a smaller portion of your paycheck to your monthly mortgage payment.

Bottom Line

In summary, when you consider all these factors together, the downward trend in mortgage rates, the slower pace of home price increase, and faster wage growth paint an optimistic picture. While affordability remains a concern, these trends suggest early signs of improvement in the housing market.