Hey guys, in real estate, we often hear the word "affordability". What does it mean and how can we break it down for our clients? Affordability has three components.
The first one is how much people are making. In the last year, on average, wages have gone up a little over 7%. So people are making a little bit more, which means they can afford a little bit more in their house.
The second leg of this is housing prices. Housing prices have flattened out compared to what we were seeing in 2019 and 2020, and in some markets, we're seeing some declines. Last quarter, home prices decreased by about 4%, which is significantly less than the double-digit gains we have seen in previous years.
The last component is interest rates. Interest rates are having the biggest impact on affordability. But it is important to remember that when buying a home, home prices are permanent, but interest rates and wages are temporary. As wages generally...
You're probably hearing a buyer say this to you. They're saying, "Hey, I wanna wait. Let's put a pin in this because I wanna wait and see what happens with the market."
Now if they say that to you, what's your response?
The language of sales matters. We're not trying to manipulate people or push people, but we wanna understand where they're coming from. And help them understand the market a little bit better.
So my response to that would be something like this:
I'd say, "Hey, I totally get it. I wanna move at your pace. I don't want you to feel rushed at all. But I do have a question for you because I wanna understand where you're coming from: What's the value in waiting?"
I'm gonna let them answer and they're gonna probably say that they think prices or maybe interest rates will come down. And my response to that would be:
"I totally understand. And if that's where you're at, I'm totally cool with that, as I said. But...
I have an important concept for you as we're coming into this challenging market with interest rates.
So I want you to think about something I call parity pricing. Let's paint a picture:
Imagine you're a buyer now. You have a $400,000 budget to buy a house. And you found one and got it in contract. Your budget for your payment is $1,767 a month. That's for principal and interest — we won't worry about taxes and insurance for this kind of demonstration.
So how we came to that number is if we were buying a home in April and we were lucky enough to get a 5.25% interest rate back then, that's what that payment would equal. But fast forward to today, we were shooting this around September where interest rates have shot up to 7.25%. In order for that buyer who only has a budget of $1,767 a month, or for that buyer to buy a house based on today's interest rate, how much would the seller have to come down to get to a parity...
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