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Home affordability still a big question for many

January 12, 2019

Affordability has been a watch word in the housing market for some time now, and that issue has only ramped up recently. With home prices still surging at rates well above historical averages, and mortgage rates creeping back toward pre-recession norms that were much higher than the levels seen in recent years, there are concerns that would-be buyers could find themselves priced out of the market.

"Home affordability hit a low not seen in more than a decade."

Indeed, home affordability in the fourth quarter of 2018 hit a point not seen in more than a decade, and tumbled further as the year went on, according to the latest analysis from ATTOM Data Solutions. For the final three months of last year, the national affordability index came in at a reading of 91, down from 94 in the previous quarter, and 106 in 2017's fourth quarter. The index hasn't been this low since it ticked 87 in the third quarter of 2008.

While that's a widely emphasized number, on a more granular level, affordability actually got a little better in 58 percent of all markets, though wage growth only grew at a faster rate than home prices in 22 percent, the report said. However, 76 percent of all metro areas examined had affordability levels that were lower than their historical averages, highlighting just how much higher prices and rates have impacted would-be buyers.

Daren Blomquist, senior vice president at ATTOM Data Solutions, noted that with affordability actually improving in some places, this might be something of a trend for the broader market to follow. Currently, the average amount of a worker's income needed to buy a home is about 35 percent of their total take-home pay, up from the all-time average of 32 percent. Moreover, making a purchase requires an up-front payment of more than $100,000 in more than 1 in 7 housing markets nationwide.

"It is cheaper to rent a home than buy in 59% of markets."

A big impediment
The fact of the matter is that these changes - while positive in many places - still make it difficult for would-be buyers to actually get into the market. Indeed, in nearly 3 in every 5 major metro areas, it has become cheaper to rent a home than to buy, according to separate data from ATTOM. That's especially true in the nation's most populous regions - those with 1 million or more residents - as all of the top 18 and 37 of the top 40 had greater rental affordability than purchase affordability.

The only places where this was not the case were in the counties that contain Detroit, Philadelphia and Cleveland, the report said. Interestingly, though, the most affordable markets tended to be in Ohio and Pennsylvania, as well as North Carolina and Wisconsin.

It's worth noting, however, that the rate at which rents are rising is greater than that of wage growth in more than half of all the markets examined, the report said. But that's actually a positive when contrasted with about 4 in 5 that are now seeing faster growth for home prices than worker compensation.

"With rental affordability outpacing home affordability in the majority of U.S. housing markets, and home prices rising faster than rental rates, the American dream of owning a home, may be just that - a dream," said Jennifer von Pohlmann, director of content and PR at ATTOM Data Solutions. "With home price appreciation increasing annually at an average of 6.7 percent in those counties analyzed for this report and rental rates increasing an average of 3.5 percent, coupled with the fact that home prices are outpacing wages in 80 percent of the counties, renting a home is clearly becoming the more attractive option in this volatile housing market."

Can anything be done?
When municipalities attempt to tackle home affordability issues so that they encourage more people to buy rather than rent, there may be many different approaches they can try. In the Twin Cities, that may come in the form of changing the level of income to home prices that are required to make a purchase, according to the Minneapolis Star-Tribune. An analysis of local home prices and incomes found that a family making $68,000 per year purchasing a median-priced home in the Minneapolis-St. Paul area would only have about $184 to spend following the first half of the month after making their monthly home payment.

That $184, plus the additional income in the second half of the month, would be required to pay for everything from utilities and transportation to internet, cellphone service, food, clothing and other necessities, the report said. Moreover, most of the houses that qualify as "affordable" in the region are more than a century old, meaning they would likely require more upkeep - and therefore, costs - than other properties.

How big is the issue?
Indeed, purchasing a new home - even the smaller ones that many construction firms now favor - is becoming much more expensive for people as wages rise at relatively low rates, according to new analysis from the National Association of Homebuilders. Today, if the median price of a newly built home were to increase by even $1,000, nearly 128,000 households would instantly be priced out of the market.

"A combination of rising prices and higher rates would have a multiplicative effect."

Likewise, if the average rate on 30-year fixed-rate mortgages rises even another quarter of a percentage point - that is, from approximately 4.75 percent to about 5 percent - it would likewise mean that as many as 1 million households wouldn't be able to afford the difference. A combination of rising prices and higher rates, then, would have a multiplicative effect on this pricing-out trend.

No effect yet?
Despite the concerns about shifting affordability, in the week ending Jan. 4 - which included calculations for the New Year's holiday - it seems that consumers were undeterred from seeking home loans, according to the latest data from the Mortgage Bankers Association. During that seven-day period, the number of mortgage applications filed nationwide increased 23.5 percent on a weekly basis (that is, from the week of Christmas) as people sought to obtain a mortgage to start the new year.

Refinances took the larger step forward, surging 35 percent on the strength of moderating rates, while purchase applications ticked up 17 percent from a week earlier, the report said. Moreover, it's worth noting that purchase activity was up 4 percent, year over year. This came as mortgage rates slid to their lowest levels seen since April.

"Mortgage rates fell across the board last week and applications rebounded sharply, after what was a slower than usual holiday period," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "The 30-year fixed-rate mortgage declined 10 basis points to 4.74 percent, the lowest since April 2018, and other loan types saw rate decreases of between 9 and 20 basis points. This drop in rates spurred a flurry of refinance activity - particularly for borrowers with larger loans - and pushed the average loan size on refinance applications to the highest in the survey (at $339,800). The surge in refinance activity also brought the refinance index to its highest level since last July."

"Rates slid to their lowest levels since April."

Kan further noted that the activity for purchases marked the strongest level seen in a month, largely due to a slower-than-normal holiday season, the report said. Nonetheless, the share of the mortgage market taken up by refinances in particular jumped to 45.8 percent - the highest level since February, and up from 42.7 percent a week earlier.

With all these conditions in mind, it's important for any would-be homebuyer - or current homeowner looking to refinance - to keep a close eye on affordability as the buying and selling season approaches. When home prices and mortgage rates rise, the long-term cost of buying a home ticks up more than they might expect. As a result, it's critical to talk to an experienced real estate agent or financial professional to determine the best time and strategy for obtaining a mortgage and making a major financial investment.




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