Affordability of Home Ownership

By Anthony La Malfa

As the old adage goes, every cloud has a silver lining, and if we can find a silver lining in how home prices have fared over the past few years, it would be housing affordability. According to a recent article, Housing Affordability – A Good Omen (we hope!), by Lawrence Yun in the September 2010 issue of the National Association of Realtor’s newsletter, Real Estate Insights, housing affordability was predicted to reach an all time high in the second half of 2010.

NAR’s Housing Affordability Index

According to the National Association of Realtors’ web site, the housing affordability index is designed to measure whether or not a typical family (one earning the median family income as reported by the U.S. Census Bureau) could qualify for a mortgage loan on a typical home (defined as the national median-priced, existing single-family home as calculated by NAR), assuming a 20 percent down payment is made.

To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home. For example, a composite housing affordability index of 120.0 means a family earning the median family income has 120 percent of the income necessary to qualify for a conventional loan. The average affordability index over the past 40 years was 118, reaching an all-time high of 184 in early 2009.

According to the article, the principal reason for the expected record housing affordability index reading is the rock-bottom mortgage rates of 4.4 percent on a 30-year fixed rate loan. In addition, modest gains in the average wage rate rose three percent in 2009 and are up 1.2 percent this year-to-date in spite of the high unemployment rate.

U.S. Homeownership Rates

However, even as the home affordability index continues to rise, the U.S. Census Bureau reports that U.S. homeownership rates have continued their downward trend through the second quarter of 2010 and remained at 66.9 percent in the third quarter. U.S. homeownership rates have not been at this low of a level since the fourth quarter of 1999. There are a number of contributing factors to the depressed homeownership rates, such as high unemployment, increased foreclosures, weak demand and more stringent mortgage underwriting standards, making qualifying for a loan difficult. U.S. homeownership rates hit a peak of 69.1 percent in the first quarter of 2005 at a time when the housing affordability index was 132.3.

Homebuyer Confidence

“A compelling argument can be made about the best affordability conditions, but it will be for naught if consumers lack confidence,” says Lawrence Yun in his article. Facing a weak economic recovery with persistently high unemployment, nine percent as of October 2010, potential homebuyers are staying out of the market, as some lack confidence in the recovery and others may feel there is additional downward housing price movement to come. Staying out of the market will only help to prove them right, as the lack of demand will result in an increase in inventory and, consequently, further downward pressure on housing prices (and possibly an increase in the housing affordability index).

The article published by the National Association of Realtors can be accessed at: www.realtor.org/research/reinsights/ archives.

The press release issued by the U.S. Census Bureau can be accessed at: www.census.gov/hhes/www/housing/hvs/qtr310/ files/q310press.pdf.