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Posted 08/12/2016

Homes Still Affordable Despite Highest Prices In 9 Years

NAHB Home Affordability Index Q2 2016

Report: It's Still A Good Time To Buy A Home

Home prices keep climbing, but homes remain affordable across the U.S.

The explanation: current mortgage rates that temper rising home prices.

Last quarter, more than six in 10 U.S. homes were "affordable" to households earning the national median income, assuming that household used a 30-year conventional mortgage to finance the home, made a modest downpayment on the property, and carried good credit scores.

The second quarter of 2016 was defined by low mortgage rates. New 3-year lows were achieved, and rates came within a breath of all-time lows set in November 2012.

This kept affordability in check. But as it stands, affordability is highly dependent on continued low rates. Prices keep rising, and hit the highest level since the second quarter of 2007.

For buyers wanting to maximize their home-buying dollar, then, the next few months may be an opportune time to purchase a home. After that, home affordability may become much worse.

Click to see today's rates (Oct 21st, 2016)

62% Of U.S. Homes "Affordable" For Typical Buyer

The National Association of Home Builders (NAHB) has released its Housing Opportunity Index (HOI) for this year's second quarter.

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 more than 225 metropolitan areas.

The index shows that, in general, homes are about as affordable today as compared to the last three quarters, despite a sharp rise in home prices.

In the first quarter of 2016, the national median home price was $223,000, but rose eight percent to $240,000 in the second quarter. That marks the highest median home price in nine years.

Fortunately, mortgage rates hit their lowest levels since three years ago during the same quarter. The result: affordability only decreased slightly. Last quarter, 65% of homes were affordable to the typical family.

This quarter, that inched down to 62%.

To determine whether a home is "affordable", the NAHB 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.

The trend in home affordability is stable for today's buyers, despite significant home price increases. Low mortgage rates have offset the gains in pricing.

  • Q4 2015 : 63.3% of homes were affordable to median income earners
  • Q1 2016 : 65.0% of homes were affordable to median income earners
  • Q2 2016: 62.0% of homes were affordable to median income earners

But, just for a point of comparison, in 2012, home affordability averaged 75% nationwide.

Still, affordability remains at a healthy level, almost exactly matching the average affordability "score" since NAHB started gathering data in 1991. What's more, homes are much more affordable than the last time home prices were this high in 2007: the Home Opportunity Index rang in at a discouraging 43.1% that year.

If you're planning to buy a home this year or next, consider moving up your time frame. Low rates -- and increased affordability -- may not last.

Click to see today's rates (Oct 21st, 2016)

Many Cities See Massive Affordability Spikes

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.

Compared to ten years ago, some cities show staggeringly higher affordability.

In 2006, the housing boom was at its peak. Home buyers and investors were paying top-dollar for homes.

Wages were not keeping up.

A correction had to happen and it did. While there was undeniable fallout, it meant home prices came "back to earth", and more families could afford to buy a home in the city where they lived and worked.

Bakersfield, California is a prime example.

In 2006, this metropolitan area had an HOI of just 16.6%. That means fewer than one in five families could afford to buy a home there.

Fast forward to 2016, and the city boasts an HOI of 62.6%, right around the national average.

Bakersfield is not the only location that offers strikingly higher affordability compared to a decade ago. The following areas are now much more affordable, too.

  • Fort Myers, Florida: 2006 HOI was 25; currently 61
  • Carson City, Nevada: 2006 HOI was 29; currently 76
  • Ocean City, New Jersey: 2006 HOI was 16; currently 54
  • Phoenix, Arizona: 2006 HOI was 27; currently 66

The title for most affordable city, however, goes to Binghamton, New York. Nearly 95% of homes were affordable to buyers with the area's median income of $66,000 annually.

Along with upstate New York, Midwest markets dominated the most-affordable rankings. California markets fared poorly.

The San Francisco-San Mateo-Redwood City California area ranked least affordable, as it has for 13 of the last 14 quarters.

Just 10.4% of households earning the area's median income of $103,400 can afford the area's median home sale price of $1,025,000.

Other low-ranking cities in California, which accounted for fifteen of the 20 Least Affordable Housing Markets, included Santa Cruz (16.3%); the Santa Ana-Irvine-Anaheim area (16.0%); and, Los Angeles (14.9%).

New York City (22.0%) was the 9th least affordable market.

What Are Today's Mortgage Rates?

U.S. home prices for homes are rising faster than mortgage rates can drop. Consider writing an offer on a home soon, therefore. By 2017, home affordability may worsen even more.

Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Click to see today's rates (Oct 21st, 2016)

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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