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Still no place like home, even as housing affordability on the wane

Soaring house prices and higher mortgage rates have put homeownership out of reach for more people than at any time in more than a decade.

Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors’ Affordability Index, a widely followed measure of the average household’s ability to buy a home at current interest rates.

For the third quarter, housing affordability fell nearly 9 percent from the same period a year earlier, according to an analysis prepared for the Wall Street Journal by Moody’s Affordability dropped by more than 20 percent in nearly two-dozen markets, including Spokane.

“You have to go back 25 years to find a decline that is as significant on a percentage basis,” says Mark Zandi, chief economist of Moody’s

Affordability has long been a problem for low-income home buyers. But as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up.

There are signs that the growing costs of homeownership are also beginning to take a toll on the housing market. “There’s a systematic erosion of affordability,” says David Seiders, chief economist of the National Association of Home Builders. That decline is “the main reason … the market is starting to cool.” Mortgage applications fell to an 11-month low last week, the Mortgage Bankers Association reported Wednesday, as applications to purchase homes declined.

Despite the drop in affordability, the percentage of households that live in a home they own is at near-record levels. Mortgage rates, though edging higher, are still relatively low by historical standards. And lenders have helped to offset declines in home affordability with creative mortgage products, such as interest-only loans, that allow borrowers to stretch into a more expensive home, while keeping their monthly payments down.

In Spokane, where affordability fell more than 28 percent over the past year, many first-time home buyers are using piggyback loans and 40-year mortgages, which have smaller monthly payments than traditional 30-year mortgages, to get into the market, says Laraine Hunter, a managing broker with John L. Scott Real Estate. “We’re getting creative with helping people get into homes,” she says.

In Seattle, declining affordability is forcing many home buyers to accept longer commutes, says Jane Powers, a broker with Ewing & Clark Inc. It’s also fueling price increases in outlying areas such as Bremerton, where affordability has fallen nearly 22 percent in the past year.

In 57 of 379 metro areas nationwide, homes were so expensive in the third quarter that a family earning the median income couldn’t afford the median-priced home based on traditional lending standards, according to Moody’s Sixteen markets have joined the ranks of unaffordable areas over the past year, according to the analysis.

To be sure, affordability isn’t a problem in many parts of the country, including Winston-Salem, N.C., and Pittsburgh.

The National Association of Realtors’ Affordability Index has declined to 115 from this year’s peak of 131 in January, according to Moody’s The higher the number, the more affordable homes are. Still, the index is above 100, a level that indicates the median-income family has the exact amount needed to buy the median-priced home, assuming a 20 percent down payment and a traditional mortgage.

“It’s not like the yellow flag is out,” says David Lereah, chief economist at the National Association of Realtors. But the decline in affordability is “a growing concern.” Nationwide, mortgage rates would have to rise above 7 percent for the NAR’s Affordability Index to drop below 100, he says. Rates on 30-year fixed-rate mortgages currently average 6.41 percent versus 5.83 percent a year ago, according to HSH Associates in Pompton Plains, N.J.