Dan Green
Dan Green
Filed Under
Mortgage Market Headlines

Home Affordability Reaches A 5-Year Low; Is It Still A Good Time To Buy A Home?

Mortgage rates and markets change constantly. Stay 100% current by taking The Mortgage Reports by email each day. Click here to get free email alerts, or subscribe to the RSS feed in your browser.

Rising mortgage rates and rising home values combined to make homes less affordable nationwide in Q3 2013

Homeownership costs increased sharply last quarter. Rising home prices combined with the highest mortgage rates in more than two years to drop the National Association of Homebuilders' Home Opportunity Index to its lowest point since 2008.

For the first time in 20 quarters, fewer than 65% of U.S. homes were affordable to households earning the national median income.

Is now a good time to buy a home? It depends on your perspective.

Click here to skip to today's live mortgage rates

Rising Mortgage Rates Makes Homes Less Affordable

Thursday, the National Association of Home Builders released its Housing Opportunity Index (HOI) for this year's third quarter.

The HOI is a quarterly home affordability gauge which tracks the typical U.S. household's ability to purchase the typical U.S. home across 225 metropolitan areas. It uses the median home sale price for an area, identifies the average 30-year fixed rate mortgage rate, then projects what a typical housing payment would be.

According to the home builder trade group, an "affordable" home is one for which the monthly mortgage payment is 28% or less of the area's median household monthly income. The index assumes a 10% downpayment on the home.

Last quarter, 64.5 percent of U.S. homes were affordable for households earning the national median income of $64,400 last quarter.

The reading is a 4.8 percentage point drop from the quarter prior. This marks the most rapid quarter-over-quarter decline in home affordability since the NAHB began tracking such data in 2005.

Throughout the last three quarters, affordability has been in steady decline :

  • 3 quarters ago : 73.7 percent
  • 2 quarters ago : 69.4 percent
  • Last quarter : 64.5 percent

Throughout this time frame, the median U.S. home sales price climbed 7% to $211,000, the average mortgage rate used by the NAHB index rose 0.72 percentage points to 4.45%; and, the median U.S. household remained unchanged.

For this quarter, though, home affordability appears better. Home prices are still rising in many U.S. markets, but  mortgage rates have dropped sharply since peaking in mid-August.

Today's U.S. home buyer has 6% more purchasing power as compared to last quarter.

Click to get today's live mortgage rates

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 Kokomo, Indiana area was ranked as last quarter's most affordable housing market. 96.9% of all homes sold were affordable to families earning the area's median income of $60,100. Roughly fifty-six thousand people live in the Kokomo region.  

Other small market cities with high affordability rankings include Vineland/Millville, New Jersey (96.0%); Davenport, Iowa (93.8); Syracuse, New York (93.3); and, Bay City, Michigan (92.4).

The top major market was the Indianapolis, Indiana area. The Indiana capitol posted an affordability ranking of 93.3. 

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 16% 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 $7779,000 last quarter.

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

From 2008-2012, home prices dropped and so did mortgage rates. The combination helped to push home affordability to all-time record levels. This year, 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 exist but monthly payments have increased. Write that offer soon. By 2014, affordability may be even worse.

If you plan to buy a home in the next 12 months, take a look at today's rates first. See how much home you can afford and consider getting pre-qualified. It's never too soon to start planning for a home. Plus, rates are available with no cost or obligation whatsoever.

Click here to ask about today's mortgage rates.

About the Author

Dan Green is a mortgage market expert, providing over 10 years of direct-to-consumer advice. NMLS #1019791. You can also connect with Dan on Twitter and on Google+.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products. The views and opinions expressed herein are those of the respective authors and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.