The record low interest rates available in 2012 helped reduce monthly mortgage payments in 82.9 percent of metros from 2011 to 2012; payments also declined in 80.3 percent of metros that experienced price gains. Even in metros with substantial price appreciation, such as Phoenix (24.6 percent) and San Francisco (11.9 percent), growth in mortgage payments was muted, rising 13.3 and 1.7 percent, respectively. In fact, interest rate declines over the last year were enough to offset price increases of up to 10 percent price appreciation.
The current interest rate environment would keep payment-to-income ratios affordable for median buyers in a majority of cities even under much larger price increases. Following the methodology used by the National Association of Realtors (NAR) in calculating their housing affordability index, a mortgage payment is considered affordable if it represents no more than 25 percent of monthly income. Using this as a threshold, mortgage payments on a median priced home were affordable in more than 95 percent of metros in 2012. Even if house prices were to rise by 20 percent, without a change in interest rates, 91.5 percent of metros would remain affordable to the median buyer. In fact, the cost of a nationally median-priced home would have to increase by more than 56.7 percent to become unaffordable at the median household income. Interest rates are so far below their historical average that few metros would become unaffordable to the median buyer even with moderate changes in interest rate. For example, if interest rates increased to 5 percent, comparable to rates in 2009, only 2 percent more metros would become unaffordable to the median buyer.
Though mortgage payments are at historic lows, purchasing a home is still unaffordable for many prospective buyers. In some traditionally expensive markets, such as the large California metros and Honolulu, monthly mortgage payments were already too costly for the median homebuyer in 2012. For first time homebuyers, whose payments are approximated using a 10 percent down payment on a home priced at 85 percent of the median, and incomes of 65 percent of the median, 17.1 percent of metros were unaffordable. The effect is more pronounced in the largest 20 metros, as 35 percent of them are unaffordable to first time buyers. (Click table to enlarge.)
While it is likely that homeownership will remain affordable in the short term, these historic levels of affordability may not last. Prices increased in 86.6 percent of metros from 2011-12 and interest rates were slightly higher in the first months of 2012 than at the end of 2012, according to thePrimary Mortgage Market Survey issued by Freddie Mac. Buyers who were waiting for the best deal as prices and interest rates continued to drop before entering the market may be spurred by current trends to think that this may be the ideal time to buy.