Washington, DC, May 6--Housing affordability conditions have improved for two consecutive quarters, keeping housing within reach for people in most of the country, according to the National Association of Realtors.
NAR’s composite Housing Affordability Index was 132.9 during the first quarter, up 1.1 percentage points from 131.8 in the fourth quarter of 2004; the index was 8.3 points below the first quarter of last year when it stood at 141.2.
The index shows the nation’s typical household had 132.9 percent of the income needed to purchase a home at the first quarter median existing-home price, which was $188,800. This means a median-income family, earning $56,323, could afford a home costing $250,900 in the first quarter.
This index measures affordability factors for all homebuyers making a 20 percent downpayment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home.
David Lereah, NAR’s chief economist, said the reason for the improvement may surprise some analysts. “Rising family income offset higher mortgage interest rates and home prices in the first quarter, boosting the overall home-buying power of the typical family,” he said. “Generally, home prices have been rising faster than income over the last four years, but the biggest factor – the monthly mortgage payment – remains historically low.”
For homes purchased during the first quarter, the median mortgage payment consumed only 18.8 percent of family income. In the early 1990s, more than 20 percent of family income went to mortgage payments on a typical home purchase, while in the early 1980s mortgage payment was more than 30 percent of income.
NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City, said the index shows there is a lot of flexibility in the market. “There would have to be a significant rise in mortgage interest rates for affordability to decline to the point where the typical family could only afford a median-priced home,” he said. “None of the forecast models show interest rates getting even close to that point, underscoring the soundness of housing as an investment for the foreseeable future.”
NAR calculates that interest rates would have had to rise to an average of 8.6 percent in the first quarter to bring the Housing Affordability Index down to 100; the 30-year fixed-rate mortgage is expected to reach 7.1 percent in the second half of next year, with one-year adjustable rate mortgages projected at 5.7 percent in the same timeframe.
According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 5.77 percent during the first quarter, up from 5.72 percent in the fourth quarter; the rate was 5.64 percent in the first quarter of 2004. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a true bottom-line mortgage cost.
Affordability for first-time homebuyers also improved in the first quarter, rising to 76.6 from a reading of 76.2 in the fourth quarter; the first quarter 2005 index was 6.1 points below the first quarter 2004 index.
The association’s First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $31,909, had 76.6 percent of the income needed to purchase a typical starter home in the first quarter with a 10 percent downpayment. The median starter home price was $160,500, during the first quarter; the typical first-time buyer could afford a home costing $122,900.
