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Industry News

Housing Affordability Rises in Fourth Quarter

February 4, 2003

WASHINGTON - Historically low mortgage interest rates and rising family income improved housing affordability conditions in the fourth quarter, according to the National Association of Realtors®.

NAR's composite Housing Affordability Index was 140.7 during the fourth quarter of 2002, up 4.8 percentage points from 135.9 reported in the third quarter; it was slightly below the same period a year earlier when it stood at 141.3.

The index shows the nation's typical household had 140.7 percent of the income needed to purchase a home at the fourth quarter median existing-home price, which was $161,600. This index measures affordability factors for all home buyers 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 fourth-quarter median family income was $52,950, which would qualify to buy a home costing $227,400.

NAR President Cathy Whatley said low mortgage interest rates have improved housing affordability considerably above historic norms. "To put this in perspective, the typical family buys a home costing between 2.5 and 3 times their annual income," she said. "With today's market conditions, you can afford a home costing about 4.3 times your income."

David Lereah, NAR's chief economist, said the interest rate used to calculate the index is the lowest it's been in the history of the series, with calculations going back to 1970. "Essentially, the drop in mortgage interest rates coupled with a modest rise in family income more than offset an increase in home prices," he said. "We project housing affordability conditions to remain fairly stable during the first half of 2003, which means we'll continue to have historically high levels of home sales."

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 6.11 percent during the fourth quarter, down from 6.41 percent in the third quarter; it was 6.71 percent in the fourth quarter of 2001. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

Affordability for first-time home buyers also improved, rising 2.7 percentage points in the fourth quarter to 81.3 from a reading of 78.6 in the third quarter; it was 1.1 points below the fourth quarter 2001 index of 82.4.

The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $36,960, had 81.3 percent of the income needed to purchase a typical starter home with a 10 percent downpayment. The median starter home price was $137,400, during the fourth quarter.

" The typical first-time buyer could afford a home costing $111,700 in the fourth quarter, which will buy a small single-family home in much of the Midwest and South," Whatley said. "In higher cost markets, notably in the Northeast and on the West Coast, this often means entry level buyers must pool their resources, or start out in a more affordable condo."

Source: The National Association of Realtors®

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