The National Association of Realtors House Affordability Index for 2012 hit an all-time high of 193.5, which eclipsed the previous record of 186.4 for 2011. Unlike interest rates and home prices, higher numbers are a good thing when it comes to this index.
A high number means more and more Americans can afford to buy a home. When the affordability index hits 100, it represents the point where a median-income household qualifies to buy a median-priced single-family home in their metropolitan area. And it’s sitting at almost 200!
Why the sustained increase? There are two primary factors at play: home prices and interest rates.
Housing is More Affordable
Home prices, driven by the housing demand in the mid-2000s, hit levels in most parts of the country at a blistering pace, establishing a record median home price of $262,500 in March of 2007. Since then, home prices had been on a steady decline, reaching a bottom in most areas across the country in October 2010 when the national median price hit $204,200.
During that time, the economy struggled. To put it mildly. The unemployment rate reached a high of 10.0 percent in October 2009. Even though the rate has gradually declined, unemployment as of January 2013 was still at an uncharacteristically high 7.9 percent. The economic doldrums kept the Fed busy keeping rates low, promising their help until the unemployment rate dropped below 6.5 percent. How low are mortgage rates?
Low Mortgage Interest Rates Contribute to Affordability
According to Freddie Mac’s weekly mortgage rate survey, 30 year fixed rates for February were around 3.53 percent, just barely above the 3.35 record set last December. Low interest rates keep borrowing costs low for borrowers, translating into more people qualifying to buy a home. When home prices reached a high in October 2007, 30 year fixed rates averaged 6.38 percent. Between October of 2007 and January 2013, median home prices fell by just over 22 percent and mortgage rates dropped by almost one half.
For example, consider a couple that makes $5,000 per month, before taxes. If those borrowers dedicated one-third of their gross monthly income for a house payment, using a common 30 year fixed rate of 3.50 percent that translates into a qualifying loan amount of $300,638.* By traveling back to October 2007 when rates were around 6.38 percent, that same couple could only qualify for a loan amount of $216,000.**
That’s why home affordability keeps getting better. But will it continue?
Mortgage Interest Rate Outlook
Mortgage rates have been below 4.00 percent since November of 2011. As long as the economic recovery appears to be at a steady pace rather than pedal-to-the-metal, there’s no indication that mortgage rates will increase sharply any time soon. The Fed has stated that they will continue with rate-dropping strategies long as the unemployment rate stays at or above 6.5 percent.
Mortgage rates are also affected by events outside of any Fed action. For example, if prices of goods and services begin to show a dramatic increase, then the Fed could threaten to increase interest rates, which would slow inflation. In fact, any economic report that indicates a strengthening economy could cause rates to gradually increase.
Will Buying a Home Get More Expensive?
Interest rates are one side of the affordability equation, what about the other side? What about home prices, will they be on the rise in 2013?
That depends upon where you live. But overall, 2013 looks like a good year for sellers as sales of existing homes are on the rise with single-family homes, condos, co-ops, and townhomes up 9.1 percent higher than one year ago. At the same time, housing inventory is at its lowest level since December 1999.
When you combine the metrics of fewer homes on the market with record affordability, you can see that increased demand for housing will soon catch up to lagging home prices, driving up the median price for existing real estate. As the demand for existing inventory continues to increase, developers will bring new homes onto the market to satisfy demand.
So what does all this say to us? It appears that the forecast for 2013 looks something like this: slightly higher home prices, fewer homes on the market, and interest rates at relative lows, all pointing to a sustained level of home affordability. There’s always the wild card and both political as well as economic events can stir the prediction pot, but as long as our economy stays its current course, 2013 could turn out to be a very good year to buy a home.
*Scenario assumes a sales price of $375,460, loan amount of $300,638, APR of 3.52 percent. Monthly payment assumes principal and interest payments of $1,350 and insurance and tax payments of $300 per month.
**Scenario assumes a sales price of $270,000, loan amount of $216,000, APR of 6.42 percent. Monthly payment assumes a principal and interest payment of $1,348 and insurance and tax payments of $300 per month.
Housing inventory statistic per Forbes.