American homes are more affordable than they've been in 40 years — but that could change sooner than you think

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The US housing market is favorable for sellers and tough for buyers right now. Prices are steep thanks to strong demand and low supply, particularly for starter homes.

But all things considered, buying a home is more affordable for millennial's now than it was for their parents, according to new data from Trulia's housing-economics research team.

"Thanks to low mortgage rates, buying a home is actually more affordable now than in the past 40 years," Alexandra Lee, a housing data analyst at Trulia, told Business Insider.

Mortgage interest rates hit 16.6% in 1981 in response to massive inflation in the US. In 2016, interest rates fell to about 3.5%, and they're about 4.5% right now.

But if interest rates continue rising as expected, home buying affordability could soon be threatened.

Because of the Republican tax bill that President Donald Trump signed into law in December, new homeowners who deduct mortgage interest are limited to deducting the interest they pay on $750,000 worth of debt, down from $1 million.

The mortgage-interest deduction has been a huge incentive to home ownership, but the new limits could deter first-timers. Millennial's are increasingly renting longer and are able to save up a bigger pot of money for a larger down payment, Zillow's CEO, Spencer Rascoff, said on an episode of Business Insider's podcast "Success! How I Did It." Ultimately, he said, millennial's are skipping starter homes and going straight to the $1 million range.

Mortgage rates are crucial for affordability

Mortgage interest rates are a crucial variable for homebuyers. For a fixed-rate mortgage, the interest rate remains the same for the life of the loan. When interest rates are low at the time of purchase, monthly mortgage payments remain low. This increases long-term affordability for the homeowner, regardless of home price or interest-rate swings.

In its latest report, Trulia found the "maximum affordable price" for the median-earning household in 100 metros every year since 1980, assuming a 20% down payment and a 30-year fixed mortgage at the annual average interest rate. The calculation included the cost of property taxes and insurance.

Article Credit: https://www.businessinsider.com/mortgage-rates-affect-affordability-cost-of-buying-a-house-2018-3

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