Home Affordability Favorable Despite Price Growth

A new report said buying a home was at the most affordable level in two years in the first quarter despite the average U.S. home price increasing at more than twice the pace of the average weekly wage nationwide over the past year.

The joint report from RealtyTrac, Irvine, Calif., and Clear Capital, Reno, Nev., said while average home price appreciation outpaced average wage growth between first quarter 2014 and first quarter 2015 in 397 out of 582 (68 percent) U.S. counties analyzed for the report, during the same period, the average interest rate on a 30-year fixed rate mortgage dropped 57 basis points (13 percent), from 4.34 percent to 3.77 percent. 

The drop in interest rates–along with wage growth outpacing home price appreciation in 32 percent of counties–meant buying a home in the first quarter required a smaller share of the average wage compared to a year ago in 339 of the 582 counties (58 percent).

“Although home prices continue to outpace wage growth in the majority of local markets, this analysis somewhat surprisingly shows that affordability is actually improving in most markets thanks to falling interest rates and slowing home price growth, which is allowing wage growth to catch up in some markets,” said Daren Blomquist, vice presidentwith at RealtyTrac. 

Blomquist said at the national level, buying an average-priced home in the first quarter was the most affordable it’s been in two years and nearly twice as affordable as it was in second quarter 2006, when affordability was its worst in the past 10 years. “At the local level we’re seeing several bellwether markets where wage growth matched or even outpaced home price growth over the past year,” he said.

The report said major markets where wage growth outpaced home price growth in the first quarter–counter to the national trend–included Cook County, Ill. (Chicago), Orange County, Calif.; Brooklyn, N.Y.; Fairfax County, Va. in the Washington, D.C., metro area; and Riverside County in southern California, where the average weekly wage in the first quarter was up 10 percent from a year ago, double the 5 percent growth in average home prices during the same period.

The report said assuming a 3 percent down payment, monthly payments on an average-priced U.S. home–including property taxes, home insurance and private mortgage insurance–required 36.5 percent of the average wage nationwide in the first quarter, down from 37.6 percent in the previous quarter and down from 37.4 percent a year agoto the most affordable level since first quarter 2013, when affordability was 33.5 percent.

The report said buying a home nationwide was at the most affordable level in the past 10 years in first quarter 2012, when monthly house payments required 32.0 percent of average wages, while buying a home nationwide was at the least affordable level in the past 10 years in second quarter 2006, when monthly house payments required 70.7 percent of average wages. Since bottoming out in first quarter 2012, the average U.S. home price rose by 24 percent while the average weekly wage nationwide rose by 7 percent during the same period and the average interest rate on a 30-year fixed rate mortgage dropped 5 percent. 

Looking ahead, the report said should interest rates rise 25 basis points by first quarter 2016 from what they were in first quarter 2015 (to 4.02 percent) and home prices and wages grow at the same annual pace they did in Q1 2015, then 76 of the 582 counties (13 percent) would exceed their historic affordability averages. Should interest rates rise 50 basis points, then 92 of the 582 counties (16 percent) would exceed their historic affordability averages. If interest rates were to rise a full percentage point (to 4.77 percent), 131 of the 582 counties (23 percent) would exceed their historic affordability averages.

Among all 582 counties analyzed in the report, the average percent of wages to buy a home in the first quarter was 35.5 percent, but the affordability ratio was above the debt-to-income threshold of 43 percent required for a qualified mortgage in 141 counties (24 percent). 

The report said least affordable counties in the first quarter were led by Eagle County, Colo., where 138.5 percent of the average wage was needed to make monthly payments on an average priced home. Other counties in the top five least affordable for buying a home in the first quarter of 2015 were Kings County (Brooklyn) (126.3 percent), Marin County, Calif. in the San Francisco metro area (119.3 percent), Santa Cruz County, Calif. (109.0 percent), and Maui County, Hawaii (99.2 percent). Of the top five least affordable markets, only Eagle County had exceeded its historic affordability average in the first quarter.

Most affordable counties in the first quarter were led by Hamilton County, Fla., where 5.6 percent of the average wage was needed to make monthly payments on an average priced home. Other counties in the top five most affordable were Saint Louis County (8.3 percent), Saint Louis City (9.4 percent), Lake County, Ind. in the greater Chicago metro area (9.5 percent), and Fairfield County, S.C. in the Columbia metro area (10.3 percent).