Not only have home values fallen in many key markets, making homeownership more accessible to the average buyer, interest rates are at historic lows, meaning that once a home is purchased, monthly payments are smaller than in our recent past.
Zillow notes that “today’s median home buyer can expect to pay about 17% of his monthly gross income on his mortgage, compared to a 25% average since 1975.”
In the 1980’s, when interest rates were dangerously near 20 percent, this would take up nearly 45 percent of a buyers gross monthly income. In comparison, today’s rates are an extreme bargain.
The main road block to homeownership at this time is access to credit. Although nearly one-third of all home purchases in recent months have been all-cash, that leaves the majority of the market shares requiring financing.
The tightening of lending standards in recent years, though, has been in direct response to the subprime lending trend during the housing boom.
Federal Reserve research indicates that a quarter of all mortgages in 2006 were subprime. This means that these loans were made to borrowers with credit scores below 620-660 and who were unable to put down the traditional 20 percent.
Today, buyers need credit scores in the 700s, with the higher the better. According to Zillow, “Applicants with FICO scores under 620 were virtually unable to get loans at any rate, thus being effectively excluded from the home-buying market. And those with FICO scores below 620 represent almost a third of the population.”
There has also been a return of the 20 percent downpayment. This is in your best interest, as it means savings when it comes to closing costs. “The difference between a 10% and 20% down payment means she now has to save up another $17,220 in addition to any closing costs.” (Zillow)
So, while it is more difficult for many homeowners to get into the market in today’s economy, for buyers who have good credit and adequate savings, homes may never have been more affordable.
- Homebuyers Don’t Understand Mortgage Basics, According to Zillow (mickeyknowsphilly.com)
- Zillow: Housing Affordability Rises, But Mortgage Access Falls (blogs.wsj.com)
- When Is It the Right Time to Buy a Home? (marealestatetrends.com)