Posted February 24, 2015
in Mortgage Market Headlines

NAHB: Falling Mortgage Rates Barely Offset Rising U.S. Home Prices

NAHB: Home Affordability improves on falling mortgage rates, but barely; California housing is the least affordable

Mortgage Rates Drop For Home Buyers

Despite the lowest mortgage rates in more than a year, the cost of owning a home remains near a 6-year high for today's buyers.

Last quarter, fewer than two-thirds of U.S. homes were "affordable" to households which earn the national median income, assuming a 30-year mortgage rate, a modest downpayment, and good credit scores.

As home prices rise, affordability may worsen, too.

Recent data shows home values up more than four percent nationwide last year and interest rates may already have started to bottom out. So, for today's buyers looking to maximize their home-buying dollar, is now the best time to buy a home?

The answer will hinge on the future of 2015 mortgage rates, the availability of low- and no-downpayment mortgages, and the strength of this year's housing market.

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Home Affordability Improves In Q4 2014

The National Association of Home Builders released its Housing Opportunity Index (HOI) for last year's fourth quarter and it shows that homes are, in general, slightly more affordable today as compared to the quarter prior.

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, 62.8 percent of U.S. homes were affordable for households earning the national median income of $63,900. The reading marks a 1.0 percentage point increase from the quarter prior, but remains well below the values from 2009-2012, when the housing market was bottoming.

Affordability has worsened as the housing market has recovered :

  • Q4 2012 : 74.9 percent
  • Q4 2013 : 64.7 percent
  • Q4 2014 : 62.8 percent

This is because, since late-2012, the median home sale price has climbed from $188,000 to $215,000; and mortgage rates are higher by about 40 basis points (0.40%) or so. During the same period of time, household wages are mostly unchanged.

Going forward, though, home values are expected to keep rising and household income is projected to remain flat. The determining factor for future home affordability, then, will be U.S. mortgage rates.

Thankfully, interest rates have been low.

Since the start of last year, 30-year mortgage rates have fallen close to 75 basis points (0.75%) and 15-year mortgage rates have similarly-large improvements. The cost of owning a home today is low, relative to where it was 15 months ago.

Many lenders quote rates in the 3s with equally low APR. As mortgage rates drop, home affordability can increase.

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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 Q3 the Housing Opportunity Index. California markets fared poorly.

Last quarter's most affordable housing market was the Cumberland, Maryland area, near the West Virginia border. 96.2% of all homes sold in the area were affordable to households earning the area's median income of $54,100. Roughly twenty-one thousand people live in Cumberland.  

Other cities which ranked high for affordability last quarter included Syracuse, New York (92.8%); Davenport, Iowa (91.6%); Duluth, Minnesota (87.4%); and Dayton, Ohio (86.2%)

The most affordable city west of the Mississippi was Pueblo, Colorado, where the affordability ranking was 88.6%. 

Meanwhile, the San Francisco-San Mateo-San Jose, California area ranked least affordable. Just 11.1% of households earning the area's median income of $100,400 can afford the area's median home sale price of $920,000.

San Francisco displaced Napa, California as the least affordable market, and has ranked last of 225 metropolitan areas in terms of home affordability for 8 of the 9 prior quarters.

Other low-ranking cities in California, which accounted for thirteen of the 14 Least Affordable Housing Markets, included Santa Cruz (15.0%); Los Angeles (16.2%); and, the Santa Ana-Irvine-Anaheim area (17.1%).

New York City's affordability ranking was #219.

Get A Complimentary Mortgage Rate Quote

U.S. home prices for homes are rising faster than mortgage rates can drop. Take note and consider writing an offer on that home soon. Into 2016, home affordability may worsen even more.

Get a complimentary mortgage rate today. Rates are available for free ,with no social security number required to get started, and no obligation to proceed whatsoever.

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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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