Housing Affordability Rises to Highest Level on Record
Housing Affordability has risen to its highest Level on Record according to recent figures. Data from the National Association of Realtors show that its Housing Affordability Index reached a historical high in January of this year. This index factors in the median home price, the interest rate, the minimum qualifying income and overall PITI payment a buyer will get on a purchase. As buyers are continuing to hear and read so many mixed signals about the housing market from the media and are probably not sure what to believe, this affordability data proves that there has never been a more affordable to buy a home than today.
It’s never been more affordable to buy a home
This chart below is the “Housing Affordability Index” that NAR uses to calculate housing affordability. (a higher index number means housing is more affordable; a lower index number means housing is less affordable). In January 2011 it recorded a highest ever figure of 191 See Here
What this means is that a family earning the median income has 191% of the income needed to qualify for a mortgage on a median-priced home.
Comparing housing in California today to housing in 2007!
Here is a Californian housing affordability index chart that compares housing affordability during 2007 with today’s housing market. It factors in the median price, PITI mortgage payment, minimum qualifying income for a buyer, and the interest rate.
As you can see by the 2nd quarter of 2007, the median price of a home in California was an incredible $503,560, and it took an average of $95k (as of 2011, $62k is the actual median income for a family in CA) in minimum qualifying income for a family to afford the median price of a home, the mortgage payment was $3,193 a month! It was during this time frame when housing affordability was getting completely out of reach for many people and home prices and mortgage payments were becoming unsustainable. Shortly after in August 2007 was when the housing market exploded.
Now compare those figures with the figures for the 4th quarter of 2010, which shows that housing has never been more affordable based on how NAR calculates their housing affordability index. Because in the 4th Quarter of 2010, it only took a family to have a minimum income of $39,600 to qualify for the median price of $256,220.
But check out Q1 in 2009, this is when housing prices hit their lowest price point, when the median price of a home was only $210,490. But by Q4 2010 the median price of a home was over $250k again. I think it is more than fair to say that when we consider the “Cost” to buy a home in terms of price and financing, we are pretty much at the bottom of the market. Sure there may be a little more depreciation in certain pockets of the market, but overall when one factors in price and overall cost, this data proves there has never been a more affordable time to buy a home than now.
What will happen when rates increase?
Here is a great chart to share with buyers that ties in with affordability. It shows just what the cost of waiting to buy will do a buyer’s monthly mortgage PITI payment as interest rates climb from 4%, to 5% and 6%. As you may recall interest rates were at 4% last November, but have already jumped to around 5% in just the past month, this 1% increase in rate means that a buyer loses 10% in purchasing power, or in other words a buyer needs a 10% reduction in price to keep the same payment as the buyer who got an interest rate of 4%.
Check out what happens on a $400k purchase on this chart, the payment jumps almost $400 a month from $1990 to $2380 when the interest rate jumps from 4% to 6%, this means that for someone who chose not buy when rates were 4% last November, they would need a 20% price reduction when rates are 6% to keep the same PITI payment.
All economists are predicting that interest rates will rise over 6% by 2012 See Here, when this happens, a buyer will lose another 10% in purchasing power, and will need another 10% reduction in price to keep the same payment as he can get today with rates at 5%.
If you have any questions about any of this information please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.
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