Mortgage Rates and Homeownership: Down Together
Mortgage rates have hit an all time low, yet homeownership continues to dip in the United States. One would assume that lowering borrowing costs would increase the number of homeowners. However, homeownership has continued to decrease in spite of low borrowing conditions. How have these seemingly contradictory metrics followed the same downward trend in recent years?
The following graphs show the interesting dynamic between mortgage rates and homeownership in the United States.
US Mortgage Rates (Borrowing Costs) Have Dropped to Lowest Levels since June 2013
Yet, Homeownership Rates Have Likewise Fallen to Historical Lows
Mortgage Rates Down, Home Prices Up
Essentially, the reason this is occurring is because the money people are saving from lower borrowing rates does not equate to the rise in housing prices. Additionally, housing prices are growing at a faster pace than the average US income. In all, the affordability of homes in the US is decreasing, in spite of lower borrowing costs.
“While the vast majority of housing markets are still affordable by their own historic standards, home prices are floating out of reach for average wage earners in a growing number of U.S. housing markets.” – Daren Blomquist
The LA times highlights another worrying trend where new homes are not being built with the first-time homeowner in mind. Instead, the housing market is moving away from entry-level properties and gravitating towards more expensive homes. While entry-level properties accounted for 30% of the housing market prior to the recession, that number today stands at less than 20%.
Affordability is not uniquely dependent on the cost of borrowing. Homes have become less affordable for the average American because of rising home prices, stagnating income and a lack of affordable homes in the market.
Strict Credit Requirements
Not only is homeownership becoming more expensive, it is also becoming harder to qualify for. Even if you have the necessary income to make up for rising housing prices, a good credit is now more important than ever.
To prevent the reckless borrowing that led to the 2008 recession, banks are more hesitant to hand out mortgages to those with poor credit scores.
“Under today’s standards, those with damaged credit history are far, far away from getting back into the housing market.” – Wei Li
What to Do
For the average American, homeownership is becoming tougher and tougher. While mortgage rates are low, housing prices are high. Now what to do with this information? What do YOU have to do to become a homeowner?
First, establish your credit score to actually be eligible for a mortgage. As evidence shows, a poor credit score can quickly eliminate your chances of becoming a homeowner.
Second, become informed of different financing options. While many people take for granted that mortgages require a 20% down payment, this is not always the case. Find financing options that are just right for you.
Third, have a plan to include homeownership costs into your monthly expenses. Keep in mind how much of your monthly income you can spend on your mortgage in order to find which home is right for you.
Fourth, set aside savings before becoming a homeowner. Besides the down payment, you will most likely encounter additional costs that come along with home ownership. These include emergencies, home maintenance and moving expenses.
Decreasing mortgage rates should not mean people are flooding the market to buy homes – far from it as evidence suggests. Use the four tips we provided to know whether or not you are ready to buy a home. Don’t be fooled by headlines urging you to buy a home because of unprecedented mortgage rates. Let’s not forget the terrible consequences of assuming lower borrowing costs means more affordable.