Wednesday, August 14, 2013

Rising Mortgage Rates Affect Home Affordability

Rising Mortgage Rates Affect Home Affordability

Tuesday, the National Association of Home Builders released its Housing Opportunity Index (HOI) for 2013's second quarter.
The HOI is a home affordability gauge. In each of 225 tracked metropolitan areas, the Home Opportunity Index takes the median home sale price and the average 30-year fixed rate mortgage rate, then projects what a typical housing payment for this "median home" may look like.
An "affordable" home is one for which the monthly mortgage payment would be 28% or less of that area's median household monthly income. The index assumes a 10% downpayment on the home.
According the National Association of Homebuilders, just 69.4 percent of U.S. homes were affordable for households earning the national median income of $64,400 last quarter.
The reading is a 4.4 percentage point drop from the quarter prior, which marks the largest quarter-over-quarter drop in home affordability since the NAHB began tracking such data in 2005.
The last three quarters have been on steady decline :
  • 3 quarters ago : 74.9 percent
  • 2 quarters ago : 73.7 percent
  • Last quarter : 69.4 percent
Throughout this time frame, the median U.S. home sales price climbed 7% to $202,000, the average mortgage rate used by the NAHB index rose 0.16 percentage points; and, the median U.S. household income sank $600 annually.
Home affordability will likely be reported lower for Q3 2013, too. Home prices continue to rise in many U.S. markets and mortgage rates are elevated as compared to last quarter's average.

Small Markets Dominate Home Affordability Study

Like all things in real estate, home affordability is a local phenomenon. Home prices, mortgage rates and household incomes vary by region, and so does the Home Opportunity Index.
"Small" markets dominated second quarter index results. "Large" markets fared poorly.
The Utica-Rome, New York area was ranked as last quarter's most affordable housing market. 97.1% of all homes sold were affordable to families earning the area's median income of $63,800. Roughly one hundred thousand people live in the Utica-Rome area.
Other small market cities with high affordability rankings include Kokomo, Indiana (95.7); Cumberland, Maryland (94.7); Vineland, New Jersey (94.7); and, Bay City, Michigan (94.6).
The top major market was the Ogden-Clearfield, Utah area. The Salt Lake City satellite region posted an affordability ranking of 92.8.
Meanwhile, at the low-end of the affordability spectrum, for the 3rd consecutive quarter, the San Francisco-San Mateo-San Jose, California area ranked at the top. Just 19.3% of families earning the area's median income of $101,200 can afford to buy homes in California's Bay Area.
The median sales price was $781,000 last quarter.

For "Great Deals" In Housing, The Door May Be Closing

From 2008-2012, falling home prices plus falling rates dropped home affordability to all-time record levels. In 2013, that trend has reversed. It's getting tougher to find "great deals" in housing. Affordability falls month by month by month.
Today's home buyers would do well to take note of the market. Low- and no-downpayment programs still exist
but, because of rising mortgage rates, monthly payments are moving higher. Maybe write that offer sooner rather than later? By 2014, affordability may be even lower.

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