Home affordability and rental affordability talk about the percentage of people who live in a specific area who may be eligible for mortgages and rentals. This information is compiled by interviewers who compare the average prices of houses or rentals in the area with the median household income in the same locality.
In other words: The affordability of a home can be considered low if most individuals would not qualify for a mortgage based on their average income. On the other hand, it can be considered high if locals bring in much more income than needed to handle the average mortgage in the area. First-time homebuyers, in particular, may want to seek out areas where home affordability is higher.
Rental affordability – the percentage of people who can afford to rent apartments, houses, and condos in a specific area – assumes that most renters will spend 30% of their maximum monthly income on rent. If the average household spends less than about a third of their income on rentals, rental affordability is high. If they spend more than 30% of their monthly income on rentals, it can be considered low instead.
Real estate investors who buy in affordable rental areas will have access to more tenants, but will generally bring in less money in rental income. Those who buy in low-affordable areas may charge a higher monthly rent, but will generally have a harder time attracting tenants.
2. Home sales
Home sales indices provide a good overview of the speed at which homes are bought in specific areas. They are updated annually and compared to the previous annual period.
The more home sales grow, the more home buyers are interested in the homes and the more likely you are to meet competing buyers. If home sales decline, however, the shoe will be on the other foot and can negotiate more favorable buying terms instead.
This is because home sales indices and the number of homes sold in a specific area and month can help you determine whether you are operating in a buyer’s or seller’s market.
3. House price
The prices for an average-sized house can also help you get a better idea of the current state of the housing market. The higher their trend, the better sellers and owners can be.
To get a better idea of the evolution of house prices nationwide, you can look at the differential price indexes. Several providers offer resources that can help you gain a detailed overview of what is happening in rural and urban areas of the country.
4. New construction
The phrase “housing startup” refers to building new properties in real estate jargon. Indeed, the more there are starts in a region, the more there are constructions in the locality. As a real estate investor, this is usually a good indicator that house prices may rise in the area if more investment dollars and construction companies pour into the area.
5. Housing supply
Wondering how much housing inventory remains and accumulates? Housing supply indices can help you get a better idea of the number of vacant homes for sale. These indexes are updated annually and can also give an idea of the number of new and older properties on the market, as well as a better idea of impending price changes.
The lower the housing supply in an area (and the fewer houses there are to buy), the more prices tend to rise and competition increases between home buyers. Alternatively, if the supply of housing tends to increase (for example, because the area has been oversized or people move to other parts of the country), prices are likely to fall.
6. Current mortgage rates
Another common indicator of the US real estate market can be found in the interest rates on 30-year fixed mortgages. Generally, the lower the interest rate, the less homebuyers will have to pay to finance a mortgage and buy a property. Lower interest rates on 30-year mortgages tend to stimulate demand for home purchases and push up prices. Higher interest rates tend to have the opposite effect on real estate transactions.
7. Mortgage origins
In view of the above, the number of new mortgages in a given region can also be an indicator of the relative strength of the housing market. Simply put: Mortgage Granting Indices monitor and reflect the number of new mortgages issued in a specific region – and the higher the number of extended mortgages, the more activity takes place in the region. A large number of mortgage arrangements tend to indicate that housing is more affordable and that housing prices are more accessible to a wider range of buyers.
8. Mortgage defaults and foreclosures
On the flip side, numerous mortgage defaults (loan repayments 30 days or more late, depending on evidence of mortgage default) and foreclosures suggest that homebuyers are struggling to make their mortgage payments.
These indices can serve as warning indicators for real estate investors and aspiring buyers that the cost of living in the area is increasing, local incomes are falling, or the financial situation of loan seekers is deteriorating. The more mortgage defaults or foreclosures you see in an area, the more your radar antennas should increase.
Severely delinquent mortgage indices also give an idea of the number of borrowers over 90 days overdue on loan repayments. The more delinquent mortgages you see appear, the more people there are in the area at risk of foreclosure, and more warning bells should tend to appear.
Upward trends here may indicate that the local economy is in decline or that home purchases were overpriced by the time borrowers closed their mortgages. You will likely find a large number of foreclosures available, which may be less appealing unless you are a rehabilitator or real estate investor with a long-term appetite for risk.
You can also look to underwater borrower indices as an indicator of the housing market. These monitor how many homeowners owe more money on their homes than they are worth.
The more underwater mortgages you see, the more you will have a good idea that the housing market is down. Conversely, if the number of underwater borrowers decreases, it is a sign that the real estate market is strengthening.
9. Change in the aggregate
The change in the overall indicator is the change in the amount of home equity that owners control. In other words, if the overall change moves towards the positive, the owners have gained equity. If it decreases, it means that homeowners have instead lost equity in their home.
In general, positive changes in overall shareholding tend to indicate that housing is becoming more affordable and that landlords are skillful in managing loan repayments. Alternatively, if equity decreases, it means housing becomes less affordable and more homeowners could face foreclosure.
10. Homeownership rate
National homeownership rates (which reflect each county across the country in their averages) can also provide a useful indicator of the US housing market. These rates are the percentage of US households that own the space in which they live and reside.
As you can imagine, a high national homeownership rate indicates housing is affordable and mortgage terms match local income rates. Of course, if the national homeownership rate goes down, it can also indicate challenges in the housing market and you may want to wait for a better time to buy a home.