Housing affordability erodes under higher prices

Higher home prices offset rising incomes and declining interest rates during the third quarter of this year, resulting in an erosion of housing affordability, according to a release from the National Association of Realtors.

NAR's composite Housing Afford-ability Index was 124.7 during the third quarter, down 1.6 percentage points from the 126.3 reported in the second quarter; it was 7.2 points below the index for the same period a year earlier, when it stood at 131.9.

The index shows half the nation's households had at least 124.7 percent of the income needed to purchase a home at the third-quarter, median, existing-home price, which was $142,800. This index measures affordability factors for all home buyers 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. The third-quarter median family income was $50,657.

The affordability index is at the lowest level since the second quarter of 1992, when it registered 123.7, said NAR President Dennis R. Cronk.

"Although home sales remain near record levels, we are concerned that affordability conditions are at an eight-year low," he said. "The biggest concern is for first-time buyers, who face an even larger challenge."

David Lereah, NAR's chief economist, said affordability for first-time home buyers is at the lowest level since the second quarter of 1990. "Our first-time buyer index dropped 1.3 percentage points in the third quarter to 73.6 a 10-year low," he said.

Lereah added a positive note. "Interest rates have been declining in recent weeks and appear to be having a stabilizing effect, but this underscores how sensitive the market is to changes in interest rates, which are the single biggest factor in entry-level housing affordability," he said.

The association's First-Time Home-buyer Affordability Index shows a typical first-time buyer household, age 25 to 44, with an income of $29,288, had 73.6 percent of the income needed to purchase a typical starter home with a 10 percent down payment. The median starter home price was $121,400, during the third quarter.

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 8.1 percent during the third quarter; down from 8.19 percent in the second quarter; it was 7.58 percent in the third quarter of 1999. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

Lereah said conditions remain fairly good for trade-up buyers, who can use the equity from their existing home to make a 20 percent downpayment.

"Our index shows a median-income family can afford a home costing $178,100 well above the third quarter median price of $142,800. Obviously, conditions vary widely across the country, but as a general national gauge, good housing affordability conditions remain," he said.

The typical first-time buyer could afford a home costing $89,400 during the third quarter about half of what a median-income family could afford. Cronk said the dramatic difference in affordable prices demonstrates the problem for first-time buyers.

"While first-time buyers are in fairly good shape in much of the Midwest and South, where home prices are relatively low, the situation in the high-cost markets of the Northeast and on the West Coast is becoming even more critical," he said.

"This means that whoever is elected president must not take today's good housing market for granted if we don't help first-time buyers, who account for 42 percent of home sales, the housing market could drop to levels where it would become a drag on the entire national economy," he said.