By:Dennis Norman
The National Association of REALTORS(R) has been reporting tracking a “Housing Affordability Index”since January 1989. The index looks at whether or not an average family (an income equal to the median income) can qualify for a loan to buy a median-priced home.
The Housing Affordabiity Index for January was at the highest level since the indexes inception,meaning homes are more affordable now,and within reach of more Americans than in the past 20 years. Major factors in this finding,in addition to falling prices,are record low interest rates since NAR uses the current interest rates to determine the income a buyer would need to qualify.
For January,NAR‘s report showed mortgage rates at 5.21% which is the lowest mortgage rate used in the past 20 years.
If the index had a value of 100 that would mean a family making the median income has the exact amount of income necessary to qualify for a loan to buy a median-priced home. A value beneath 100 means the family is falling short of enough income and any over 100 means the family has more than enough income.
For January the indexfor the U.S. was 166.8. This is up from 153.2 in December and up from 133.5 a year ago. This means the average family in the US has 60% more income than they need to buy an “average”(median-priced) home.
Looking at this affordability you would think people would be running out the door to buy a home. Agents should be working 24/7 to keep up with the demand. After all can homes get much more affordable? Good question.
So maybe potential buyers fear prices will drop further,which may very well happen? Let’s think about that though….if prices would drop say another 10% that would bring the median home price down from $169,900 to $152,910 (almost back to 2000 prices) that would have an impact on affordability but what if the interest rates go back up to a more “normal”range during the same period? Last year the average mortgage rate was 6.15% or almost a full percent higher than now. If rates go back up 1% that would wash-out the 10% additional drop in price from an affordability standpoint,in other words the payment on the home would be about the same.
I would think this would make it pretty tempting to go out and buy a home now realizing that any further decline in value may be offset by the record low interest rate you can get on your mortgage. There is a catch,of course: if by chance you would need to sell in the near future then you would be at a disadvantage over the person that waited for lower prices to buy but took on a higher rate loan. You are going to owe more on your mortgage as you have not been there long enough to get it paid down.
Talking about affordability is only relevant to someone that has the money for a down payment,closing costs,etc,and a stable income they feel they can count on. If your business is struggling or you are in fear of losing your job,your company closing and so on,it doesn’t really matter how “affordable”something is,does it? However,for those folks that are fortunate enough to be in a position to buy a home now,I think the opportunities should be hard to pass up.
Related posts:
- Homes are more affordable than ever –again!
- Housing affordability slips in June;but homes still very affordable
- Homes are affordable;Should you buy? Rent? Do home prices need to fall further?
- When it comes to homes…The Price is Right!
- Home Affordability Index Indicates Housing Most Affordable in Over 40 years
