Home affordability erodes in first half of 2017

Most industry watchers believe home prices will keep moving up
and the strong sellers’ market will keep going for some time barring a recession.
Housing economists don’t agree, however,
on how relatively affordable the market is for buyers.

On Wednesday, the National Association of Realtors (NAR) reported
that the median national home price had reached a new record high at $255,600
in the second quarter. Prices in some cities are at truly eye-popping levels. A
home in the nation’s most expensive market, San Jose, California, for example,
will cost $1.18 million, NAR reported. The median sales prices in San Francisco
and Los Angeles aren’t that far behind.

Nationally, however, NAR’s data suggests that the housing market remains
solidly affordable. The trade group’s affordability index — a measure of  how easy it is for a typical wage earner to
qualify for a mortgage to cover 80 percent of the home-purchase price — remains solidly in the affordable range at 151. This is a gauge for the entire market, based on incomes, mortgage rates and home prices. A number above 100 indicates that borrower will be able
to afford the mortgage payments, assuming a 20 percent downpayment.

Notably, NAR’s affordability index for first-time buyers fell
below the 100 threshold in the second quarter, to 99.7.

NAR’s Chief Economist Lawrence Yun has warned for months about the potential for an affordability crisis, given the strong demand for homes and
ultra-tight inventories in some markets, especially at the lower-priced end of
the market. NAR’s composite affordability index has fallen from a height of
214.5 in January 2013.

“The number is above 100 comfortably, which implies that a
median-income person should easily be able to buy a median-priced home,” Yun
said in a telephone interview this week. “But it is all relative. Compared to
what it had been say, three, four, six years ago, the affordability is lower
now. And the reason why it is lower is because home prices have grown much
faster than people’s income.”

Other indices that have measured affordability have also
been weakening. The title insurance company First American Corp’s real price
index, for example, was up just over 10 percent year over year in May.

First American’s index factors in changes in wages and
mortgage rates. That index appears to indicate that home prices on a national
basis are well below the real price of homes in 2000, which is often benchmarked
as a normal market.

First American Chief Economist Mark Fleming said the real issue with the
housing market today is not the price of homes, but the lack of inventories,
which affords buyers and potential sellers fewer choices. Rising mortgage
rates and rising prices will eventually catch up with the market, however.

“There are more expensive markets than others, but
practically everywhere housing remains, by historic standards, affordable,” Fleming
said. “That said, nationally we have lost 10 percent affordability. We are
moving quickly toward decreasing affordability. That is because house prices
are significantly outpacing income growth and interest rates are beginning to
rise. Even though the level of affordability is very high, it is not getting
better, it is getting worse.” 

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