Posted August 16, 2014

When’s The Best Time To Buy A Home When Prices For Homes Keep Rising?

Home Opportunity Index (HOI) drops to lowest level since 2008

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 mortgage rate and modest downpayment.

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.

Click to get a live rate quote now.

Home Affordability Drops In Q2 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 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.

Click to see today's live mortgage rates

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.

Get Today's Mortgage Rates

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 next quarter or 2015, home affordability may be even worse..

Compare today's mortgage rates now. Rates are available for free online with no social security number required to get started and no obligation to proceed.

Click to get a live rate quote.

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

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2014 Conforming & FHA Loan Limits

Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.