In the past few years, many people have found it challenging to buy a home due to affordability issues. While it's still tough out there, there are signs that things might be getting a bit easier, with potential for further improvement as the year progresses. Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), puts it this way:

“Housing affordability is improving ever so modestly, but it is moving in the right direction.”

Let's take a closer look at the three key factors that influence home affordability: mortgage rates, home prices, and wages.

1. Mortgage Rates

Mortgage rates have been quite volatile this year, fluctuating between the mid-6% to low 7% range. However, there's some positive news. Data from Freddie Mac shows that since May, rates have generally been on a downward trend.

This improvement in mortgage rates is partly due to recent economic, employment, and inflation data. While we can expect some ongoing fluctuations, experts believe that if economic data continues to indicate cooling, mortgage rates might keep decreasing.

Even a slight drop in rates can significantly impact affordability. Lower rates mean lower monthly mortgage payments, making it easier to afford the home you want. However, don’t expect rates to return to the 3% range anytime soon.

2. Home Prices

The second major factor is home prices. Nationally, prices are still rising, but not at the breakneck pace we saw a couple of years ago. The slower price growth is a positive sign for potential buyers.

During the pandemic, home prices soared, putting homeownership out of reach for many. Now, with prices increasing more gradually, buying a home might feel more achievable. Odeta Kushi, Deputy Chief Economist at First American, notes:

“While housing affordability is low for potential first-time home buyers, slowing price appreciation and lower mortgage rates could help – so the dream of homeownership isn’t boarded up just yet.”

3. Wages

The final factor is wages, which have been rising steadily. Data from the Bureau of Labor Statistics (BLS) shows that wages have been increasing at a faster rate than usual.

This is good news for buyers because higher wages mean more income to allocate toward a mortgage. When your earnings increase, your monthly mortgage payment takes up a smaller portion of your paycheck, making homeownership more affordable.

Bottom Line

When you combine these factors—declining mortgage rates, slower home price growth, and rising wages—it becomes clear that while affordability is still a challenge, there are early signs that the situation may be improving.