Home affordability boosted by rising wages and low rates

Julie C. Nichols General

Reblogged from Scotsman Guide – Victor Whitman

Study: Homes are more affordable now, not less

The National Association of Realtors (NAR) in a report last week blamed an August slowdown in homes sales on tight inventories and rising prices that have put pressure on home affordability.

Housing analysts disagree, however, on whether the cost of homes has truly become a problem for the country.

Some studies suggest that homes have become more affordable this year despite rising prices, as wages rose and mortgage rates fell to near historic lows.

First American Financial Corp., a title company, reported this week that real home prices declined in 37 of 43 metropolitan areas it tracks when the prices in those markets are adjusted for income growth and mortgage rates.

First American’s Real Price Index fell 2.1 percent in July from the June level and was down 4.8 percent compared to July 2015. The company estimates that real home prices are nearly 40 percent lower than during the housing peak in July 2006, and over 21 percent lower than in 2000, a period sometimes referred to by housing experts as a normal market.

Prices, when adjusted for income and rates, also fell year over year in the high-priced cities of San Francisco (down 6.2 percent) and Washington, D.C. (down 7.2 percent). Some economists have suggested these markets are overvalued, and housing bubbles could have already formed.

First American’s Chief Economist Mark Fleming said people have been too focused on strong nominal gains in home prices without adjusting for other factors that can soften the blow. Without adjusting, home prices have jumped around 5 percent to 6 percent annually on a national basis, according to the leading surveys.

“The shortage of inventory listed for sale continues to be problematic; however, the gains in affordability are helping the market reach its potential for home sales,” Fleming said. “A rise in estimated median household incomes is also playing a large role in certain key markets that otherwise seem expensive when just considering nominal house prices, and not factoring in the boost in buying power provided by increased income levels in those markets,” Fleming continued.

Other economists say many markets have an affordability issue, however.

Attom Data Solutions will a release a report later this week that suggests that nearly a fifth of all housing markets are unaffordable when home prices in those markets are compared to their estimated long-term sustainable level. The index examines the average wages needed to service a 30-year fixed mortgage with a 3 percent downpayment within each market.

Attom Data Senior Vice President Daren Blomquist said home affordability did improve in this past second quarter because of the low rates and rising incomes. In the second quarter, some 18 percent of the 417 county housing markets that the company tracks were not affordable. That percentage was down by 2 percentage points for the same quarter a year earlier.

“There was kind of this surprising improvement in affordability,” Blomquist said. “Unfortunately, I can tell you that that is not going to look like it is going to be continuing in the third quarter. Almost one in five markets we would say are not affordable by their historic standards.”

Blomquist also said some markets appear to be in housing bubbles. He mentioned Brooklyn, New York; the San Francisco Bay area; and Denver as markets with inflated prices.

“That doesn’t mean there is an imminent downturn in those markets, but the ratios of incomes to home prices doesn’t make sense,” Blomquist said. “That is why I would call those bubbles at this point.”

NAR analyst Danielle Hale also said there is ample evidence that markets along the East and West coasts are getting too pricey for entry-level buyers. She agreed, however, that homes are still generally more affordable than during the housing bubble a decade ago.

She said the issue of affordability is showing up most in the market for lower-priced homes. Typically, younger first-time buyers are having a hard time finding affordable homes in many areas of the country. These buyers often also face other challenges, such as student-loan debts and high rents, which make it hard for them to save for a downpayment.

“That is not the case everywhere,” Hale said. “There are some pockets of the country that are affordable, and we have looked at identifying those markets.”

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