How affordable is housing for potential buyers? Today’s Housing Affordability Index produced by the National Association of Realtors® yields some insight—the best in decades.
- The headlines have recently screamed about record low mortgage rates and still soft house prices. How does this translate into affordability for potential buyers? NAR combines this information along with data on median family income into a Housing Affordability Index—an index designed to track how affordable a median priced home is to a median income family. The data show that the median priced home is more affordable to the median income family than is has been in decades.
- In short, the higher the index the more affordable the median priced home is for the median income family. (A more detailed explanation is available at this footnote[1].) November’s index is the second highest on record. The highest index on record was the previous month, October 2011. For a full look at the data, click here.
- Of course, affordability is only one aspect potential home buyers are likely to consider when deciding whether now is the right time to purchase. Family situation, work situation, and the desire to own a home are all important considerations motivating buyers according to the Profile of Home Buyers and Sellers. Additionally, potential buyers will weigh the affordability of buying against the alternative of renting. NAR has several resources that equip you to help your clients with this decision including a field guide, rent vs. buy brochure, and regular short articles on our blog.
[1] An index of 100 means that the family with median income earns exactly the income needed to qualify to purchase the median priced home. Anything greater than 100 signals that the median income family has more income than is necessary to qualify to purchase the median priced home, and the greater the index, the greater the median income is relative to the qualifying income. Conversely, an index value less than 100 indicates that the median income family does not have enough income to qualify to purchase the median priced home.
Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update highlights new employment figures.
- Today’s data on jobs was unambiguously good. Payroll jobs rose by 200,000—more than expected. At the same time, the unemployment rate continued to fall and is now at 8.5 percent—when many had expected an uptick after last month’s decline.
- Trends we’ve observed for the past several months are seen in today’s data. The government continues to shed jobs, but at a slower rate of 12,000 jobs compared to a recent average of nearly twice that. The private sector is the driver of job growth. Additionally, the labor force shrank somewhat in December (by 50,000 workers), but the number of employed persons increased by 3.5 times that. Further, in the last 6 months of 2011, nearly half a million workers joined the labor force. The participation rate—those of the population in the labor force—is at a low last seen in the early 1980s, but the decline seems to have stemmed.
- While the market still has not returned to normal—since early 2010 we’ve recovered about a third of all jobs that were lost in the recession and slightly more than a third of the private jobs that were lost since 2007—the positive trajectory is unmistakable, and a solid labor market is a good sign for the economy and for potential home buyers.
- Record low mortgage rates, steady incomes, and falling home prices combined to boost affordability in Boise, Idaho.
- The ratio of debt service (principle and interest) relative to the local median household income stood at 9.3% in the 2nd quarter of 2011, down from 9.4% in 2010 and well below the national average of 14.7%.
- Historically, the local long-term average was 13.4%.
- Curious about affordability conditions in your market? For more information, see the Local Market Reports for the 2nd quarter of 2011.
Housing affordability will be at its highest in a generation this year.
The affordability index is comprised of median home prices, median family income, and the prevailing mortgage rate. An index of 100 implies that a median income family has just enough income to buy a median priced home. An index of 120 implies that a median income family has 20 percent more income than is necessary to buy a median priced home. The index reached an all-time high (since the data creation in 1970) of 174 in 2010. This year, it looks to surpass 180. The rising affordability is a combination of lower home prices, record low mortgage rates, and a slight rise in family income.
A downside to the home buying market has brought an upside to the rental market. Occupied rental units have risen from 2005 when people were getting priced out of the bubble prices and then accelerated in light of rising foreclosures and the weak economy.
Naturally, higher renter demand means an opportunity to raise rents. Initially, rents did not rise much, because of the need to first absorb many vacant units. But as rental demand continued to move up, along with quite low levels of new construction of multifamily units (mostly apartments) in recent years, it was inevitable that rents would rise.
The effective apartment rent rose 2.3 percent in 2010 according to REIS, a private data collecting firm focusing on commercial properties. As of the first quarter of 2011, rents were higher by 2.5 percent from one year ago. All indications are for further increases in rents for the remainder of the year and probably into 2012. The above private company measure, interestingly, tends to move with wider swings and are now notably higher than what is implied in the government consumer price index data on renter’s rent, which rose 0.2 percent in 2010 and by 1.1 in the first quarter of 2011. The difference could be attributed mostly to large metro market coverage by REIS while the government tries to cover both urban and rural areas of all sizes. It could also be a current understatement in government data, which means inevitable further strong gains in rent in upcoming consumer price index releases.
Independent of the rent measurement issues, one thing that is clear is the rising rent trend. Furthermore, an increasing number of financially capable renters will pull out a calculator and start to analyze whether or not it now makes more sense to buy. In many markets, it is indeed likely that buying makes more sense than renting for comparable living space.
In the short run, home prices will be strictly determined by demand. Supply cannot be brought in line in a short time-frame. It takes time to get permits, draw up architectural plans, bring in earth-moving equipment, etc. Therefore, a spike in the number of buyers along with a fixed supply of homes will result in home prices shooting through the roof.
In the long run, however, prices will be mostly determined by supply, particularly from the cost of construction and land prices. If homes are selling for $300,000 and the cost to buy the land and build a near-identical home is $200,000, then home builders will find themselves busy. Sufficient supply then would bring the price back down to the point where incentives to further build would disappear.
Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update highlights retail sales and the producer price index.
All real estate is local. Therefore, despite the slump in the national figures, there will naturally be some local areas with price increases. According to a report from the government agency that regulates Fannie and Freddie, the top 20 markets with the strongest home price appreciation as of the first quarter in 2011 are:
The cliché says that there has never been a better time to buy. The hard data in the housing affordability index confirms that. The affordability index, which takes into account median income, median home price, and mortgage rates, has been bouncing around in the 180 to 200 range since the beginning of this year – the highest reading since the index was first used in 1971.
International vs U.S. Housing Affordability
In a recent report, “The 8th Annual Demographia International Housing Affordability Survey,” which referenced NAR’s housing data, the authors look at housing affordability in 325 metropolitan markets in Australia, Canada, Hong Kong, Ireland, New Zealand, the United Kingdom and the United States.
The survey showed that housing affordability is highest among U.S. markets. Following the U.S. are markets in Canada and Ireland. The United Kingdom, Australia and New Zealand rank as the least relatively affordable markets.
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