Rising home prices and mortgage rates may make it feel as if New York City’s real estate is beyond your reach. This may be especially true when reading about the multi-million dollar sales around the city. However, buyers need not fret. Although New York’s prices may never be considered cheap, it is more affordable based on historical standards.
According to studies, including one by Zillow Real Estate Research, affordability, as measured by the percentage of one’s income that goes towards the mortgage, remains below historical levels. Of course, in certain places such as New York City and San Francisco, this amount is well above the national average. However, people are well aware of this fact, and make a conscious decision to bear the higher cost of living to reside in these locations.
Historically, from 1985 to 2000, homeowners in the New York metro area spent 32% of their income on mortgage payments, defined as principal and interest payments. The percentage is based on the area’s median income. This has fallen to 25%, as of the fourth quarter in 2013.
Even if mortgage rates spike to 7% from the current level of about 4.25%, New Yorkers will be spending 35% of their income, slightly above the historical average. This assumes prices appreciate, although at that level it is possible it will affect home prices negatively.
There is another caveat. Property taxes are higher in many locales outside the area as it is used to fund local needs, including education. Therefore, one must consider this when factoring the monthly payment going towards on housing.
Moreover, in the classic argument between renting and owning, the latter may have an edge. In a separate study by Zillow, New Yorkers are spending 39.5% of their income on rent. This is much higher than the 25% currently spent on mortgages. The difference is even larger when considering the tax deduction homeowners receive for property taxes and mortgage interest.
Of course, aside from current economic benefits, there is the possibility of price appreciation, which traditionally has been at the rate of inflation. This depends on when one purchased in the cycle, but if you are planning on holding for a long period, this will smooth out the sharp fluctuations such as the tremendous rise during the build-up and subsequent bursting of the housing bubble.
New York State’s Office of Budget and Policy Analysis conducted a similar study. In 2012, 27.1% of Manhattan’s homeowners were above the affordability threshold, defined as spending more than 30% of income on mortgages. The trend had moved downward since the year 2000 when the figure was 28.1%.
Although not as affordable as it was during the Great Recession, the data shows home ownership in the area may still be within your means. Unemployment was high a few years ago, and many were concerned about future employment prospects. The economy appears on an upswing according to recent statistics. Therefore those on the fence may wish to fall on the side ownership.