Affordability

Casey Hamlin
Reliant Mortgage Co
e-mail Casey


Affordability:  that you have the financial means for.

Even though home prices have been rising, the National Association of Realtors (NAR) said this past week that 2012 appears primed to set a record for housing affordability.  With 11 months of data in, NAR's Housing Affordability Index was at 198.2 in November, higher than in November 2011.  When December data is compiled, NAR projects that the housing affordability index for 2012 will be a record high 194, up from 186 from 2011, the previous record year. 

The index is based on the relationship between median home price, median family income, and average mortgage interest rate.  An index of 100 is the point where a household with a median income for the local area has exactly enough income to qualify for the purchase of a median-priced single family home in that area.  The assumptions are the buyer has a 20 percent down payment and that the resulting mortgage payment would not exceed 25 percent of gross income. The higher the index, the greater the household purchasing power and buyers with small down payments, typical of first-time buyers, would have relatively lower affordability levels than those with larger down payments. 

In computing the index NAR used a national median home price of $180,600 and median income of $61,758.  The principal and interest payment would be $649 which represents 12.6% of household income.  Now consider standard underwriting practices of the secondary market typically allow a buyer to pay up to 29% of the monthly gross income and you can see why home buying affordability is considered so high.

In the Northeast the median home price was $230,000 and income was $71,066 resulting in an index of 180.1, up from 178.4 in October.  The Midwest had the highest index at 250.7, up 0.5 from October, based on a home price of $143,100 and income of $61,732.  In the South the median home was priced at $161,300 and the income was $56,821 for an index of 204.8, down from 210.6.  The West had the lowest affordability index of all regions at 145.8, down from 147.2.  The median home price in the west was $251,200 and the median income was 63,527.

Lawrence Yun, NAR chief economist, said home buyers are able to stay well within their means by saying "although 2012 was highest on record, the excessively tight underwriting precluded many would-be homebuyers from locking-in generational low interest rates," he said.  "Rising home prices and a gradual uptrend in mortgage interest rates will offset improvements in family income, but 2013 likely will be the third best on record in terms of household buying power.  A window of opportunity remains open for buyers who can qualify for a mortgage." 

According to the national mortgage professional website, “For the entire 2012 calendar year, the 30-year fixed rate mortgage averaged 3.66 percent, the lowest annual average in at least 65 years.” Freddie Mac.com reported the difference between interest rates between 2012 and 2011 was around .79%.  Using the average price of $230,000 after putting down 20% the average buyer would be financing $184,000 making the average difference in payments $83/month translating into $996/year comparing 2011 to 2012 from an interest rate perspective.

 

NAR projects the housing affordability index to average 160 during 2013, which means on a national basis that a median-income family would have 160 percent of the income needed to purchase a median-priced existing single-family home. 

Association President Gary Thomas said the minor erosion in affordability conditions moving forward could be mitigated by bank and regulatory policies.  "Clearer rules from the government regarding future lawsuits and buybacks of Fannie and Freddie loans could encourage banks to use their massive cash holdings to originate more loans. A more sensible lending environment that makes it easier for other financially qualified buyers to get a mortgage would allow many more households to enter the market, boosting home sales as much as 10 to 15 percent," Thomas said.

Submitted by Casey Hamlin, Reliant Home Mortgage Company, LLC
Greater Portland Board Affiliate Member