Housing Affordability: Three Perspectives

With home prices at record highs, available housing inventory at historic lows and a surge of Millennials clamoring for homeownership, housing affordability has emerged as an important–and occasionally, contentious–issue.

Three reports this week shed some perspective. Zillow, Seattle, reported mortgage payments in the first quarter have required the largest share of income since 2008. ATTOM Data Solutions, Irvine, Calif., said U.S. home prices in the first quarter were at the least affordable level since 2008. And First American Financial Corp., Santa Ana, Calif., said higher interest rates won’t affect home affordability as much as simply being able to find a home to buy.

The Zillow quarterly report said the share of median income needed for monthly mortgage payments on the median U.S. home increased to 17.1 percent in the first quarter, up from 15.9 percent in the fourth quarter. This represented the second-biggest quarterly increase in the mortgage burden since the housing crisis began in 2007; in fourth quarter 2016, the share of income needed for mortgage payments increased from 14.1 percent to 15.6 percent.

Zillow Senior Economist Aaron Terrazas noted hroughout the housing market recovery, low mortgage rates helped sustain housing affordability, even as home values climbed to new peaks. But mortgage rates increased sharply to start the year, rising nearly 50 basis points in the first three months, with affordability waning as a result.

“For the past few years, historically low mortgage rates provided the silver lining for buyers as prices rose higher and higher,” Terrazas said. “If you were able to come up with a down payment, the low rates kept monthly housing costs relatively affordable in most parts of the country. Now, though, as rates are on the rise and home values are climbing at their fastest pace in 12 years, that affordability edge is getting thinner. In markets that have seen some of the biggest increases in home values, housing costs already take up a larger share of income than they did historically, making it all the more difficult for buyers.”

Zillow noted between 1985 and 2000, mortgage payments took up an average of 21.1 percent of the median income. Now, mortgage payments are a bigger financial burden than they were historically in nine of the 35 biggest U.S. metros. San Jose, Calif., has the least affordable mortgage payments, requiring more than half of the typical income.

Terrazas cautioned should mortgage rates reach 5 percent next year, as the Mortgage Bankers Association and other economists expect, home shoppers in an additional seven markets would face greater mortgage burdens than buyers did historically, including Sacramento, Orlando and Tampa.

ATTOM’s second quarter U.S. Home Affordability Report showed nationwide, the median home price of $245,000 increased by 4.7 percent from a year, down from 7.4 percent appreciation in the first quarter but still above the average weekly wage growth of 3.3 percent. Since bottoming out in Q1 2012, median home prices nationwide have increased 75 percent while average weekly wages have increased 13 percent during the same period.

The home affordability index of 95 fell from 102 in the previous quarter and 103 in Q2 2017 to the lowest level since Q3 2008, when it stood at 86.

“Slowing home price appreciation in the second quarter was not enough to counteract an 11 percent increase in mortgage rates compared to a year ago, resulting in the worst home affordability we’ve seen in nearly 10 years,” said Daren Blomquist, senior vice president with ATTOM Data Solutions. “Meanwhile home price appreciation continued to outpace wage growth, speeding up the affordability treadmill for prospective homebuyers even without the rise in mortgage rates.”

ATTOM said annual growth in median home prices outpaced average wage growth in 275 of the 432 counties analyzed in the report (64 percent), including Los Angeles County; Maricopa County (Phoenix); San Diego County; Orange County, Calif.; and Miami-Dade County, Fla.

Lowest home affordability indexes in Flint, Denver, Santa Fe, Nashville
Counties with the lowest home affordability indexes in Q2 2018 were Genesee County (Flint), Michigan (70); Denver County, Colorado (72); Adams County (Denver area), Colorado (73); Santa Fe County, New Mexico (73); and Wilson County (Nashville area), Tennessee (75). Nationwide, an average wage earner would need to spend 31.2 percent of his or her income to buy a median-priced home in the second quarter, above the historic average of 29.6 percent.

Meanwhile, First American Chief Economist Mark Fleming noted the likely rise in mortgage rates is not the worry for first-time home buyers, but whether they can find something to buy in today’s supply-constrained market.

The company’s monthly Potential Home Sales Model for May found potential existing home sales increased to a 6.11 million seasonally adjusted annualized rate (SAAR), a 0.8 percent month-over-month increase and a 63.8 percent increase from the market potential low point reached in February 2011. “The market for existing-home sales is underperforming its potential by 4.7 percent,” Fleming said.

Fleming said changes to the short-term rate matter little to the housing market. “Mortgage rates, particularly the popular 30-year, fixed-rate mortgage, are benchmarked to the 10-year Treasury bond,” he said. “While Federal Funds Rate hikes don’t directly drive up the yield on the 10-year Treasury, higher inflation expectations certainly do. The Fed’s decision to raise rates for the sixth time in a year and a half was primarily viewed by experts as a reaction to the possibility of higher inflation due to continued improvement in the labor market and economy in general.”

But will higher mortgage rates curtail demand for housing? According to the Potential Sales Model, should the 30-year, fixed-rate mortgage rate increases to 5 percent, the impact on the market potential would be a modest decline to 6.10 million existing-home sales. “The reason mortgage rates are rising–positive economic conditions–is also causing household income to rise, which helps offset the increase in borrowing costs from higher rates,” Fleming said. “Additionally, home buyers can adjust to higher mortgage rates by substituting a lower rate adjustable-rate mortgage for the fixed-rate mortgage or buy a less expensive home. In other words, the housing market is flexible and can adjust to moderately higher mortgage rates without significant impact. The likely rise in mortgage rates is not the worry for first-time home buyers, but whether they can find something to buy in today’s supply-constrained market.”