Housing teetering on the edge of unaffordable

Scotsman Guide - Victor Whitman - 30 March 2017

More jobs, higher wages and surging consumer confidence are combining to spur increasing demand for homes, but the flip side is that buyers are having a harder time finding homes in an affordable price range.

Housing analysts universally agree that the market’s affordability level eroded last year. They disagree on the extent of the problem.

Housing shortages have pushed up prices in large swaths of the country. The National Association of Realtors bemoaned the lack of for-sale properties all last year, particularly in the low- to mid-price range.

CoreLogic, which supplies the data for the much-watched S&P CoreLogic Case-Shiller price indices, has deemed 105 U.S. metros “overvalued.”

On the other hand, analysts also have pointed out that rising wages and low mortgage rates, which are running about 2 percentage points below the historic average, have helped to offset rising home prices and kept them relatively affordable in every market.

During the last housing boom, home prices were artificially driven up by loose lending and appraisal standards. That is not the case this time.

Mark Fleming, chief economist at the title company First American Corp., said nearly half of the markets that the company tracks recorded a decline in affordability over the 12 months ending this past January, but markets are still generally affordable by historic standards. He estimated that mortgage rates would have to go up to around 5.4 percent to drive off homebuyers in significant numbers.

Fleming also said the rapid rise in home prices doesn't necessarily indicate that a market is heading for a bubble. Some markets have come up from the bottom of the last downturn, while other cities have had rapid job gains and growth that can absorb the home-price increases. Also, he said a market’s affordability level is hard to gauge accurately.

“What’s unaffordable for one person may be affordable for another,”  Fleming told Scotsman Guide News. “Affordability is really a first-time homebuyer concern, so a good way of evaluating whether or not a market is becoming too expensive is watching for a drop-off in the number of first-time homebuyers.”  

Teetering on the edge of affordability

Attom Data Solutions said the U.S. housing market is at the tipping point, near the edge of moving into unaffordable territory on a nationwide basis.

Attom’s affordability index — which measures the average wage needed to purchase a median-priced home in a particular market against the historic average — fell 16 points year over year in the first quarter, to a level of 103, which is lower than at any point since the end of 2008 — right before the housing crisis. A reading of lower than 100 suggests that the market is below the average affordable level.  

The current market conditions are much more affordable than during the last housing market peak in 2006, however.

“The index at its worst got as far down to 67 in the second quarter of 2006, which is when home prices hit their peak,” said Daren Blomquist, a senior vice president with Attom. Blomquist said that affordability has become a point of concern, however.

“It is causing problems, especially for real estate agents,” Blomquist told Scotsman Guide News. “For the long-term growth prospects of the real estate market in a given area, affordability should have a chilling effect on the market if it is not resolved. So, it is a problem. It is not good for the long-term sustainability of a given market.”