How Misunderstandings About Housing Affordability Could Cost You

Dated: June 1 2021

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How Misunderstandings About Housing Affordability Could Cost You


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There’s a lot of discussion about home affordability in the Tampa Bay area as home prices continue to appreciate rapidly. Even though the most recent index on affordability from the National Association of Realtors (NAR) shows homes are more affordable today than the historical average, some potential home buyers still have concerns about whether or not it’s truly affordable to buy a home right now.

While it may seem overwhelming to purchase a home right now, there are various measures of affordability to consider. Additionally, it's important to note that very few of the indexes compare the affordability of owning a home to renting one. In a paper just published by the Urban Institute, Homeownership Is Affordable Housing, author Mike Loftin examines whether it’s more affordable to buy or rent. Here are some of the highlights included:

1. Renters pay a higher percentage of their income toward their rental payment than homeowners pay toward their mortgage.

The report explains:

“When we look at the median housing expense ratio of all households, the typical homeowner household spends 16 percent of its income on housing while the typical renter household spends 26 percent. This is true, you might say, because people who own their own home must make more money than people who rent. But if we control for income, it is still more affordable to own a home than to rent housing, on average.”

Here’s the data from the report shown in a graph:How Misunderstandings about Affordability Could Cost You | MyKCM

2. Renters don’t have extra money to invest in other assets.

The report goes on to say:

“Buying a home is not a decision between investing in real estate versus investing in stocks, as financial advisers often claim. Instead, the home buying investment simply converts some portion of an existing housing expense (renting) into an investment in real estate.”

It explains that you still have a housing expense (aka rent payments) even if you don’t buy a home. You can’t live in your 401K, but you can transfer housing expenses that you'll have anyway into a real estate investment that will grow in value over time. A mortgage payment is forced savings; it goes toward building equity you will likely get back when you sell your home. There’s no return on your rent payments no matter how long you rent a home for. 

3. Your mortgage payment remains relatively the same over time. Your rent keeps going up.

The report also notes:

“Whereas renters are continuously vulnerable to cost increases, rising home prices do not affect homeowners. Nobody rebuys the same home every year. For the homeowner with a fixed-rate mortgage, monthly payments increase only if property taxes and property insurance costs increase. The principal and interest portion of the payment, the largest portion, is fixed. Meanwhile, the renter’s entire payment is subject to inflation.

Consequently, over time, the homeowner’s and renter’s differing trajectories produce starkly different economic outcomes. Homeownership’s major affordability benefit is that it stabilizes what is likely the homeowner’s biggest monthly expense, assuming a buyer has a fixed-rate mortgage, which most American homeowners do. The only portion of the homeowner’s housing expenses that can increase is taxes and insurance. The principal and interest portion stays the same for 30 years.”

A mortgage payment remains about the same over the 30 years of the mortgage. Conversely, here’s what rents have done over the last 30 years:How Misunderstandings about Affordability Could Cost You | MyKCM

4. If you want to own a home and can afford it, waiting could cost you a lot more.

As the report also indicates:

“We need to stop seeing housing as a reward for financial success and instead see it as a critical tool that can facilitate financial success. Affordable homeownership is not the capstone of economic well-being; it is the cornerstone.”

Homeownership is the first step to financial success for most households, as their home is most often their largest asset. Think about it, even in a modest housing market, home values historically appreciate at +4% per year. During that time, not only will the value of your real estate investment grow, your mortgage balance will also go down. When you rent, you pay off the mortgage for the landlord and the landlord's asset grows over time. Renters will see spikes in their housing costs that are far more dramatic than homeowners with a fixed-rate mortgage. 


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Bottom Line

If the current headlines reporting a supposed drop-off in home affordability are making you nervous, let’s connect to go over the real advantages of owning and holding real estate investments for the long term. Contact us today by messaging us. Or call/text us at (727) 400-3315.

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Jesse Lee Templeton

Originally from Ohio, Jesse prides himself on providing unmatched real estate services and market knowledge in the Tampa Bay, FL real estate market. He is committed to offering real estate solutions t....

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