Housing affordability slips in first quarter

Rising home prices and slightly higher interest rates offset a modest rise in household income, causing a minor erosion in housing affordability during the first quarter, according to the National Association of Realtors.

NAR's composite Housing Afford-ability Index was 137.2 during the first quarter, down 3.8 percentage points from 141.0 reported in the fourth quarter; it was 3.0 points below the same period a year earlier when it stood at 140.2.

The index shows the typical household had 137.2 percent of the income needed to purchase a home at the first quarter median existing-home price, which was $150,900. 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 first-quarter median income was $52,168.

David Lereah, NAR's chief economist, said the affordability reading is a reflection of tight inventories of homes available for sale. "Lean housing inventories in a strong sales market have been pushing up home prices across the country, with the median-priced existing home costing 8 percent more than a year ago," he said. "At the same time, mortgage interest rates rose but are now beginning to ease. The overall effect is a slight dampening of affordability conditions during the first quarter."

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 6.86 percent during the first quarter, up from 6.71 percent in the fourth quarter; it was 7.21 percent in the first quarter of 2001. This is a weighted average interest rate between fixed and adjust-able loans and represents a bottom-line mortgage cost.

NAR President Martin Edwards Jr. said the good news is that housing affordability conditions remain favorable in most of the country. "Our index shows that the median-income household could afford a home costing $207,000, which is well above the national median price," he said. "The big concern is for first-time buyers, who must struggle with downpayment and closing costs to make the transition from renting to owning."

Affordability for first-time home buyers slipped 2.6 percentage points in the first quarter to 79.8; it was 2.5 percentage points below the first quarter 2001 index of 82.3. The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $29,764, had 79.8 percent of the income needed to purchase a typical starter home with a 10 percent downpayment. The median starter home price was $128,300, during the first quarter.

Edwards said first-time buyers must be a little more creative to enter the market. "Our index shows that the typical entry-level buyer can afford a home costing $102,400, meaning buyers must often consider a small starter home or a condo, especially in the higher cost markets in the Northeast and on the West Coast," he said. "This is why it's important for first-time buyers to learn about loan programs designed to fit their needs, and underscores the importance of programs such as FHA to help lower-income buyers."

The National Association of Realtors is a trade association, representing about 800,000 members involved in all aspects of the residential and commercial real estate industries.