Mortgage Rates Drop For Home Buyers
Despite the lowest mortgage rates in more than a year, homeownership costs for buyers increased through this year’s third quarter.
For the first time since 2008, fewer than 62% of U.S. homes were affordable to households earning the national median income, assuming a 30-year mortgage rate, modest downpayment, and good credit scores.
Meanwhile, home prices are expected to rise into 2015.
So, for buyers looking to maximize their purchasing power, is now the best time to buy a home? The answer will depend on 2015 mortgage rates, the future of low- and no-downpayment mortgages, and next year’s housing market.
For now, though, affordability is getting worse.
Home Affordability Drops In Q3 2014
The National Association of Home Builders released its Housing Opportunity Index (HOI) for this year’s third quarter and it shows that homes are, in general, 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, 61.8 percent of U.S. homes were affordable for households earning the national median income of $63,900. The reading marks a 0.8 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 :
- Q3 2012 : 74.1 percent
- Q3 2013 : 64.5 percent
- Q3 2014 : 61.8 percent
Since two years ago, the median U.S. home sales price climbed 14% to $221,000, average mortgage rates are up 55 basis points (0.55%); 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, interest rates have been on decline.
Since the start of this year, 30-year mortgage rates have dropped more than one-half percentage point and 15-year mortgage rates have dropped by close to 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 with equally low APR. As mortgage rates drop, home affordability can increase.
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 Kokomo area of Indiana. 94.8% of all homes sold in the area were affordable to households earning the area’s median income of $56,900. Roughly fifty-seven thousand people live in Kokomo.
Other cities which ranked high for affordability last quarter included the Cumberland, Maryland area, near the West Virginia border (94.8%); Davenport, Iowa (93.8%); Mansfield, Ohio (92.0%); and Springfield, Ohio (91.3%)
The most affordable “big” market market was Youngstown, Ohio, where the affordability ranking was 89.1%.
Meanwhile, for the first time, Napa, California ranked least affordable. Just 10.2% of households earning the area’s median income of $70,300 can afford the area’s median home sale price of $510,000.
Napa displaced the San Francisco-San Mateo-San Jose, California area, which has ranked last of 225 metropolitan areas in terms of home affordability for the 7 prior quarters.
Other low-ranking cities in California, which accounted for thirteen of the 14 Least Affordable Housing Markets, included Santa Cruz, California (14.8%); Los Angeles, California (16.3%); and, Salinas, California (16.7%).
New York City’s affordability ranking was #218.