Affordability is Declining and is Likely to Get Worse

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ATTOM Data Solutions, formerly known to us as
RealtyTrac, has released an affordability report which shows that median home
prices in the first quarter of 2018 failed to be affordable for average wage
earners
in 304 or 68 percent of the 446 counties the company analyzed for the
report.

And a separate CoreLogic report tells us why.

The ATTOM report determined affordability by
calculating the income needed to make monthly house payments; principal,
interest property taxes, and insurance – on a median priced home. Their
calculations presumed a 3 percent down payment, the minimum available from FHA
and less than required by Fannie Mae and Freddie Mac, and a 28 percent maximum
debt-to-income ratio on the “front end,” that is required monthly payment on
debt before adding the house payment factor.

Using the above parameters, the report
says that nationwide it required 29.1 percent of an average wage earner’s income
to buy a median-priced home in the first quarter of 2018. This is slightly
below the historic average of 29.6 percent of income. In other words, the
nationwide median home price, $229,500, would require $57,009 in income. According
to the Bureau of Labor Statistics, the average wage is $54,847, making a median-priced
home unaffordable
to an average wage earner.  

Among
the 304 counties considered unaffordable for average wage earners were Los
Angles, Maricopa (Phoenix), San Diego, Orange (CA), and Miami Dade. The 142
counties still considered affordable were Cook (Chicago), Harris (Houston,
Dallas, Wayne (Detroit), and Philadelphia.

Daren
Blomquist, ATTOM Data Solutions senior vice president, said, “Coastal markets are the epicenter of the U.S. home
affordability crisis, but affordability aftershocks are now being felt further
inland as housing refugees migrate from the high-cost coastal markets to
lower-priced markets in the middle of the country where good jobs are
available,” said Daren Blomquist, senior vice president with ATTOM Data
Solutions. “That in turn is pushing home prices above historically normal
affordability limits in those middle-America markets.”

 

 

The ATTOM
report contains an exhaustive list of U.S. counties and the various aspects and
ramifications of their affordability or lack of it, but one bit of information
stood out
. Of the 10 most expensive counties (note, the criteria here was
housing price, not affordability), eight experienced negative net migration.  This means more residents moved out of the
areas than moved in. These were the counties containing Brooklyn, San Jose, and
Manhattan, as well as the California counties of Orange, San Mateo, Marin, Napa,
and Santa Cruz.

If the situation is bad now,
CoreLogic only sees it growing worse. Its Home Price Index Forecast suggests U.S.
home prices will rise by about 5 percent this year. However, factoring in some
interest rate forecasts leads to a conclusion that mortgage payments could
increase nearly 16 percent. In other words, mortgage payments could rise at
triple the rate of home prices.

CoreLogic utilizes what it calls a “typical mortgage payment” to assess
affordability. It is calculated using Freddie Mac’s average rate on a 30-year
fixed-rate mortgage with a 20 percent down payment but does not include taxes
or insurance. The company calls this a good proxy for affordability as it
mimics the amount a borrower would have to qualify to obtain a mortgage to buy
a median priced home.

Andrew LePage, writing in the CoreLogic Insights blog says a consensus of opinions
from sources such as Fannie Mae, the Mortgage Bankers Association, and others
is for an 82-basis point increase in mortgage rates between December 2017 and
the end of this year. CoreLogic forecasts an increase in the median sale price
of a home of 3.4 percent in real terms (5.1 percent nominal). Based on these
predictions, the inflation-adjusted typical mortgage payment would move during
the same period from $800 to $911. This would be a 13.9 percent year-over-year increase,
15.8 percent in nominal terms. With forecasts estimating that real disposable
income will rise by about 4 percent this year, it is clear that homebuyers will
have to devote a larger portion of their income to mortgage payments.

 

 

Figure two shows that, while the
typical mortgage payment has trended higher in recent years, last December it
was well below the all-time 2006 high of $1,265 even though there was not a lot
of difference in home prices.  Home
prices in 2006 were a median of $246,576, or 199,900 in 2006 dollars. The median
at the end of 2017 was about $35,000 less. Still there was a 36.8 percent
difference in mortgage payments. because in 2006 the average mortgage rate was
about 6.7 percent.  In December 2017 it
was under 4 percent.



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