Despite falling mortgage rates, homeownership costs increased through this year’s second quarter.
For the first time since 2008, fewer than 63% of U.S. homes were affordable to households earning the national median income, assuming a 30 year fixed mortgage interest rate and modest down payment.
With home prices expected to rise into 2015, is now the right time to buy a home for maximum affordability? A lot will depend on low mortgage rates and the future of low- and no-downpayment mortgages.
Home Affordability Drops In Second Quarter of 2014
The National Association of Home Builders released its Housing Opportunity Index (HOI) for this year’s second quarter and it shows that homes are, generally, less affordable today as compared to three months ago.
The Housing Opportunity Index is a quarterly gauge of home affordability which tracks the typical U.S. household’s ability to purchase the typical U.S. home. Data is collected across 225 metropolitan areas.
To determine whether a home is “affordable”, the NAHB first gathers the median home sale price for an area, then identifies the average 30-year fixed rate mortgage rate during the period, and, finally, projects what a typical housing payment would be.
An”affordable” home is one for which the front-end debt to income ratio is 28% or less of the area’s median household monthly income. The front-end debt-to-income ratio is calculated as (total housing payment) divided by (total monthly gross income).
The index also assumes conventional financing via Fannie Mae or Freddie Mac, plus a ten percent home downpayment.
Last quarter, 62.6 percent of U.S. homes were affordable for households earning the national median income of $63,900. The reading marks a 2.9 percentage point decrease from the quarter prior and is the lowest affordability ranking since the third quarter of 2008.
Not coincidentally, Q3 2008 was the quarter during which the U.S. economy began its slide into recession. During September of that year, Fannie Mae and Freddie Mac were taken into conservatorship ; Lehman Brothers failed; and Merrill Lynch was bought by Bank of America.
Affordability has been steadily lower as the housing market has recovered :
• Q2 2012 : 73.8 percent
• Q2 2013 : 69.3 percent
• Q2 2014 : 62.6 percent
Since two years ago, the median U.S. home sales price climbed 16% to $214,000, average mortgage rates are up 39 basis points (0.39%); and, the median U.S. household is mostly unchanged.
Going forward, home values are expected to keep rising and household income is expected to remain flat. The determining factor for future home affordability, then, is U.S. mortgage rates. Thankfully, rates have been on decline.
Since the start of this year, 30-year mortgage rates have dropped closed to one-half percentage point and 15-year mortgage rates have dropped by about the same. The cost of carrying a loan is low relative to where it was at the New Year.
Many lenders now quote rates in the 3s. As mortgage rates drop, home affordability can increase. Rates may continue dropping through the fall months, and into the winter season.
California Least Affordable; Midwest Most Affordable
Like all things in real estate, home affordability varies by area. Home prices, mortgage rates and household incomes all vary by metropolitan markets, and so does the Home Opportunity Index.
Midwest markets dominated Q2 the Housing Opportunity Index. California markets fared poorly.
Last quarter’s most affordable housing market was the Cumberland area of Maryland and West Virginia. 97.2% of all homes sold in the area were affordable to households earning the area’s median income of $54,100. Roughly twenty thousand people live in the Cumberland region.
Other cities which ranked high for affordability last quarter included Kokomo, Indiana (96.1%); Davenport, Iowa (92.3%); Battle Creek,
Michigan (92.2%); and Lima, Ohio (92.0%)
The most affordable “big” market city the Indianapolis, Indiana area. The Indiana capitol posted an affordability ranking of 89.3%.
Meanwhile, for the 7th consecutive quarter, the San Francisco-San Mateo-San Jose, California area ranked last of 225 metropolitan areas in terms of home affordability.
Just 11.1% of households can afford the Bay Area’s median home sale price of $880,000 despite a median household income of $100,400.
Other low-ranking cities included Santa Cruz, California (16.6%); Napa, California (17.1%); and, Orange County, California (17.6%).
New York City’s affordability ranking was #218.
Home affordability is slipping. Prices for homes are rising faster than mortgage rates can drop. Buyers should take note. Consider writing that offer soon. By the end of year or 2015, home affordability may be even worse.