Tag Archives: Housing Affordability Index

JCHS: Despite Rising Home Prices, Homeownership More Affordable than Ever

Despite Rising Home Prices, Homeownership More Affordable than Ever

 by Rocio Sanchez-Moyano
Research Assistant
For those able to obtain loans in today’s constrained credit environment, the monthly cost of homeownership is at historic lows, thanks to low interest rates.  Though the National Association of Realtors’ median single family home price increased by 6 percent in 2012, falling interest rates have made mortgage payments cheaper: assuming a 20 percent down payment and 30-year fixed-rate mortgage, monthly payments on a median priced home in 2012 were $644. Compared to median incomes, payments are lower than they have been in more than two decades.

Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors;  US Census Bureau, Moody’s Analytics Estimates.

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.)

Notes:  Payments and payment-to-income ratios for the median homebuyer assume a 30-year fixed-rate mortgage with 20 percent down payment on a median priced home and median income for the metro; for a first time homebuyer, payments and payment-to-income ratios assume a 30-year fixed-rate mortgage with a 10 percent down payment on a home priced at 85 percent of the median and an income of 65 percent of the median, as per the NAR first time homebuyer affordabilityindex. Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors; US Census Bureau, Moody’s Analytics Estimates.

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.

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DrHousing: The Good, the Bad, and the Ugly aspects of the American housing market

The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market.

The US housing market is massive.  You would expect this from a nation of 315,000,000+ people spanning over 50 states.  So it is important to understand the various dynamics occurring over many states.  In regards to single family home buyers, in most of the United States home prices are very reasonable.  This is hard for some in the coastal regions to digest or even comprehend.  When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details.  Yet with such a large number of investors purchasing with cash, a new market has been created.  But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market.  Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque.  What can we say about the current US housing market?

The Good

One good aspect of the market is overall, affordability is back in line to historical trends:

housing affordable

Price-to-rent ratios are back in line in many parts of the country.  In fact, this is the big push from the all cash buyers in places like Arizona, Nevada, and Florida.  The one thing I would be cautious about is in places like Arizona, you have over 50 percent of buyers coming from the investment bunch and when you look at rental prices, they are weak and vacancies are very common.  But with such a high number of investors buying, you basically have investors selling to other investors thinking they will produce higher yields.  However, for non-investors in most US markets prices are now affordable thanks to the big drop in prices but also the Fed’s tantalizingly low interest rates.  Sure, the Fed’s balance sheet is well over $3 trillion but that is an issue for another day.

If you follow the mainstream press and use this as a barometer of what most Americans see as their primary source of information, then the Federal Reserve might as well be nuclear physics because it is never discussed or even explained.  So most people are driven by the monthly nut psychology.  Low rates have boosted affordability dramatically.  Americans are horrible savers.  Something like 50 percent of Americans do not have a retirement account.

I was having a conversation with someone and their mentality is similar to many coastal folks.  “Good luck finding a property in the US for less than $300,000 in a safe area!”  Of course, it is hard for some to understand that in many states, homes can be had for $100,000 in good areas and a $200,000 home will buy you a very nice spot.  Heck, even in the Inland Empire in California you can find a great place for $300,000.  Of course this person is obsessed with buying in prime Pasadena so good luck on that one when you have limited inventory and many other clones with similar thinking.

The Bad

While not as good as it should be, household formation is now picking back up:

household formation

Funny how in 2005 when all you needed was a pulse for credit, household formation was up to a blistering 1.8 million per year.  The crash brought on the “move in with mom, dad, or friends” trend and you can see this in 2008 where household formation was at a stunningly low 400,000.  This is also another reason why the housing market is now picking up nationwide.  From 2011 to 2012 household formation went from around 600,000 to a healthier 1,000,000.  That is a big jump.

The one element I see getting in the way of this is the massive student debt in the market now above $1 trillion.  Many younger Americans are still financially strapped so it is hard to see this improving anytime soon.  Although we are nowhere close to the boom days, household formation does seem to be on an upward trend and this is a positive for housing in general.

The Ugly

The housing market is still a mess when it comes to distressed properties:

bad loans

Over 5,000,000+ Americans are in one of the following:

1,927,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.

1,483,000 properties that are 90 or more days delinquent, but not in foreclosure.

1,694,000 loans in foreclosure process.

The market is full of bad loans but the number is going down.  Many investors buying in bulk have connections that allow them to purchase many of these properties at auction before they even hit the MLS for the regular Joe and Jane.  So the low inventory is simply a manifestation of banks leaking out properties at their own pace and to select individuals.

In most parts of the US, the housing market is fairly normal based on price and financing options.  However, in places like California good luck buying a home when many in the industry think prices will keep going up and bidding wars are now fairly common.  Get your PowerPoint presentation ready and your heart wrenching story (and wallet out) to make a bid in many prime markets.  California is a boom and bust market and we’re currently in the boom phase.  It is interesting how many e-mails I get where the person is actually sad and emotionally troubled that they got out bid on an $800,000 or even $1,000,000 home.  Obviously you can only get so much from an e-mail but some people seem miserable because they can’t spend $1 million on a home!  I got an e-mail like this from someone in San Francisco.  You know what my recommendation was?  Go ahead and buy because you seem absolutely miserable!

For most Americans, the decision to buy is fairly simple in today’s market.  In other markets, there are definite manic like behaviors.  We’re seeing some mania in California.  Buying a home is a big decision yet some are willing to drop $700,000 (i.e., finance 80+ percent of the purchase) and treat this as if they were buying a car. Buying a home is a 30 year commitment for most.  Many sell within 7 to 10 years but that is assuming prices keep going up.  Some that bought in 2005 are still underwater today (8 years later).  You want to know what was going on 30 years ago?  Ronald Reagan was President, we were in the Cold War, The Red Hot Chili Peppers launched their first self-titled album, and a fixed rate mortgage was 13.4 percent.

There are good, bad, and ugly things in today’s housing market.  The scope of each of these really depends on where you live in the US.

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