Interest rates on mortgages have begun to climb again, with mortgage rates rising to just under 5%. While they’re still not high in historical terms—I consider anything under 6% a real gift since I remember the double-digit rates of decades ago—I know that potential homebuyers are looking at the rise and thinking: Should I buy that property now?
Obviously, you have to decide if buying is right for you, in terms of where you are in your life. If you think you might move to a new city in the next couple years for love, a career, or just adventure, don’t buy, rent! But if you’re just thinking in terms of numbers, let’s look at one specific measurement: the Affordability Index.
What Is the Affordability Index?
The Affordability Index tracks the ratio of the median cost of buying a house to the median income. Sometimes it’s presented as a percentage: If you live in a place where the median cost of buying a house is $10,000 a year and the median income is $50,000, then housing would consume 20% of your budget. If the median cost of buying that house goes up 10% (let’s say interest rates rise, so the same housing now costs $11,000 a year), then housing would consume 22% of your budget.
Colin Barr of Fortune.com notes that housing was at its most affordable back in October, when buying the median house cost 13% of the median income. There’s been a small bounce in that percentage to 14% as rates have risen, but just look at the comparison—“that's barely half of the 25% of income Americans were ill-advisedly funneling into house purchases at the top of the housing bubble,” Barr notes.
Two Things to Consider
First, affordability nationally means very little to you, because you need to get a property that you can afford in the town where you live, not halfway across the country. By that yardstick, Florida and California look pretty affordable at this point. Affordability measures have gone up in Orlando, Sacramento, and San Bernadino, to name three spots, but that doesn’t help you much if you live in Chicago. So you’ll need to keep a tight watch on your local market.
Second, even if homes are affordable, mortgage lending is tight, so you’ll need a relatively high down payment— perhaps 20% and good credit. If you can leap those hurdles, though, you might consider buying a home. So, do the math in order to find out whether that home you’ve been eyeing is quite as affordable as it seems … for you.