Thursday, December 22, 2005

Housing Affordability

This morning’s WSJ Personal Journal section features an article on Housing Affordability hitting a 14 year low.

WSJ subscription required to view

Here is a link to the actual data:

Realtor data

I agree that there is a “systematic erosion of affordability,” certainly compared to the some of the data that we have seen in the last decade.

The sensitivity of the data to interest rates and hence mortgage principal and interest payments demonstrates the fine thread on which a robust housing market hangs.

One should not lose sight of the fact that for most locations in the U.S. with the notable exception of the West, at least according to this calculation, housing prices are affordable.

The methodology combines two broad median measures to come up with the index. The index measures whether or not a typical family could qualify for a mortgage loan on a typical home. A typical home is defined as the national median-priced, existing single-family home as calculated by NAR. The typical family is defined as one earning the median family income as reported by the U.S. Bureau of the Census.

To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home. An index value of 120 means that the family has 120% of the income needed to qualify for this mortgage.

The index assumes that the buyer has a 20% down payment. Big assumption.

The index also assumes that there is a 25% qualifying ratio, in other words, monthly P&I cannot exceed 25% of the median family income. As we all know, in today’s mortgage world, this is a very conservative and conventional assumption.

Some of the anecdotes in the article are quite disturbing. Only 43% of homes sold in the third quarter were affordable to the median income family…this compares to 50.4% a year ago and is the lowest since 1992. The article also mentions that in Tucson, roughly 60% of buyers make no down payment and use 100% financing.


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