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Industry News

Housing Affordability Rises in First Quarter

May 3, 2004

WASHINGTON – A drop in mortgage interest rates, rising family income and a dip in home prices boosted housing affordability conditions in the first quarter, according to the National Association of Realtors®.

NAR's composite Housing Affordability Index was 144.1 during the first quarter of 2004, up 5.4 percentage points from 138.7 reported in the fourth quarter; it was 0.8 point below the same period a year earlier when it stood at 144.9.

NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., said any index above the 100 mark means generally favorable conditions exist. "As a broad national gauge, the housing affordability index is expected to stay above 130 for the rest of the year – meaning there's a lot of headroom in the market," he said.

The index shows the nation's typical household had 144.1 percent of the income needed to purchase a home at the first quarter median existing-home price, which was $170,800. This index measures affordability factors for all homebuyers making a 20 percent downpayment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home. The first-quarter median family income was projected to be $54,517.

David Lereah, NAR's chief economist, noted interest rates have spurted in recent weeks. "Although mortgage interest rates have risen in the last month, housing affordability conditions remain favorable," he said. "There are some challenges in the more expensive markets, but on balance, most of households in the United States can readily afford a typical home."

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 5.64 percent during the first quarter, down from 5.83 percent in the fourth quarter; it was 5.90 percent in the first quarter of 2003. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a true bottom-line mortgage cost.

In the first quarter, a median-income household could afford a home costing $246,100, which is well above the national median price of $170,800. "The typical family could afford to buy a home costing more than 4.5 times their annual income. Even so, the typical buyer paid just over 3.1 times their income for a home, so on a national basis home buyers are a far cry from overextending themselves," Lereah said.

Affordability for first-time homebuyers also improved, rising 3.8 percentage points in the first quarter to 83.4 from a reading of 79.6 in the fourth quarter; it was 0.5 point below the first quarter 2003 index.

The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $30,980, had 83.4 percent of the income needed to purchase a typical starter home with a 10 percent downpayment. The median starter home price was $145,200, during the first quarter.

The index shows the typical first-time buyer could afford a home costing $121,100. "Although it's usually a challenge to buy your first home, there are more state and local programs today that are targeted to help entry level buyers," McDonald said. "Realtors® are a great source for information about first-time buyer programs that are available in their area.

Source: The National Association of Realtors

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