Realty Views By Terry Ross

Affordability Taking A HitTerry Ross, Realty Views

September 10th, 2013 – The increased housing activity spurred mainly by investors over the past year has had the fairly predictable outcome of stabilizing and even raising prices, and at the same time putting a dent in the affordability for the average consumer.

Amid reports that investors are being put off by the increasingly higher prices that they must pay to purchase homes to flip and resell or to turn into rental properties, perhaps a more serious issue is that for the average consumer the cost of purchasing a home is going up because of higher prices and higher mortgage rates, while the income to pay for these increases is rather stagnant.

This is going to be an increasing dilemma moving forward. One of the awkward nuances of the current increase in prices is that much of it is not driven by true consumer demand but by the investor market. If investors drive prices beyond a sustainable affordability factor, the real consumer buyer will be frozen out of the market in many cases and a slowdown in sales and appreciation will follow.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI), 69.3 percent of new and existing homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $64,400. This is down from the 73.7 percent of homes sold that were affordable to median-income earners in the first quarter, and is the first time that the standard has fallen below 70 percent since late 2008.

“Housing affordability has been hovering near historic highs for the past several years, largely due to exceptionally favorable mortgage rates and low prices during the recession,” said NAHB Chairman Rick Judson, a homebuilder from Charlotte. “Now that markets across the country are recovering, home values are strengthening at the same time that the cost of building homes is rising due to tightened supplies of building materials, developable lots and labor.”

NAHB Economist David Crowe points out that, along with median price increases, government actions might also make housing less affordable to the average family.

“Rising home prices signal the improving health in housing markets, and the median price of all new and existing U.S. homes sold in this year’s second quarter, at $202,000, was well ahead of the second quarter 2012 median price of $185,000,” Crowe added. “Together with rising mortgage rates, this contributed to affordability slipping to the lowest level in more than four years. Such movement would be less concerning were it not for ongoing discussions regarding potential changes to the mortgage interest deduction and federal support for the secondary mortgage market, both of which play enormous roles in keeping homeownership affordable.”

The methodology of the NAHB/Wells Fargo Housing Opportunity Index is to take a percentage of homes sold in a given area that are affordable to families earning the area’s median income during a specific quarter. Core Logic, a data and analytics company, collects prices of new and existing homes sold from actual court records. Mortgage financing conditions incorporate interest rates on fixed and adjustable-rate loans reported by the Federal Housing Finance Agency.

Given these methods, Ogden-Clearfield, Utah, was rated the nation’s most affordable major housing market for a fourth consecutive quarter while a newcomer – Utica-Rome, New York – was the most affordable smaller market in the latest survey.

Of the larger metro areas, 92.8 percent of all new and existing homes sold in this year’s second quarter were affordable to families earning the area’s median income of $70,800. This was slightly lower than the 93.4 percent of homes sold that were affordable to median income-earners in the previous quarter.

Meanwhile, just over 97 percent of new and existing homes sold in Utica-Rome in the same period were affordable to families earning that area’s median income of $63,800.

Other major U.S. housing markets at the top of the affordability chart in the second quarter included, in descending order, Indianapolis-Carmel, Indiana; Harrisburg-Carlisle, Pennsylvania; Youngstown-Warren-Boardman, Ohio-Pennsylvania; and Buffalo-Niagara Falls.

Smaller markets joining Utica at the top of the affordability chart included Kokomo, Indiana; Cumberland, Maryland-West Virginia; Vineland-Millville-Bridgeton, New Jersey; and Bay City, Michigan.

For a third consecutive quarter, San Francisco-San Mateo-Redwood City held the lowest spot among major markets on the affordability chart. In that area, just 19.3 percent of homes sold in the second quarter were affordable to families earning the area’s median income of $101,200.

Other major metros at the bottom of the affordability chart included Los Angeles-Long Beach-Glendale; Santa Ana-Anaheim-Irvine; New York-White Plains-Wayne, New York-New Jersey; and San Jose-Sunnyvale-Santa Clara; in descending order.

All of the least affordable small housing markets were in California in the second quarter. At the very bottom of the affordability chart was Santa Cruz-Watsonville, where 30 percent of all new and existing homes sold were affordable to families earning the area’s median income of $73,800. Other small markets at the lowest end of the affordability scale included San Luis Obispo-Paso Robles, Salinas, Napa and Santa Rosa-Petaluma.

If this trend continues, the danger is that, if investors seriously cut back on their purchases of homes, they will then have driven prices artificially high and have created a price level that the average consumer will not be able to afford, which could spin the market back to a heavily favored buyer’s market with declining prices once again.

(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at terryross1@cs.com or call  562/498-1049.)