Rising Prices Nip Housing Affordability in Second Quarter

August 2, 2002

WASHINGTON DC ? Housing affordability conditions slipped in the second quarter but remain at levels that are favorable for the typical family, according to the NATIONAL ASSOCIATION OF REALTORS®.

NAR's composite Housing Affordability Index was 132.6 during the second quarter, down 4.6 percentage points from 137.2 reported in the first quarter; it was 2.3 points lower than the same period a year earlier when it stood at 134.9.

David Lereah, NAR's chief economist, said any index reading over 100 is favorable for the national housing market. "Higher home prices offset lower mortgage interest rates and an improvement in household income during the second quarter, but interest rates have since declined to historic lows and should help housing affordability conditions in the current quarter," he said. "Generally, interest rates are the biggest variable in housing affordability, but the lean supply of homes on the market caused a spike in second-quarter prices."

Housing Still Affordable

The index shows the typical household had 132.6 percent of the income needed to purchase a home at the second quarter median existing-home price, which was $157,700. 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 second-quarter median family income was estimated to be $52,429.

"A household earning the median income could afford a home costing $209,100 in the second quarter, which is well above the median price in most markets across the country," Lereah said.

NAR President Martin Edwards Jr. said the second-quarter median existing-home price was 7.4 percent higher than a year earlier. "The rate of price appreciation should moderate in the second half of the year as housing inventory levels improve, meaning the current drop in mortgage interest rates should stabilize the index," he said. Edwards is a partner in Colliers Wilkinson & Snowden Inc., Memphis, Tenn.

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 6.82 percent during the second quarter, down from 6.86 percent in the first quarter; it was 7.15 percent in the second quarter of 2001. This is a weighed average interest rate between fixed and adjustable loans, including the cost of points, and represents a true bottom-line mortgage cost.

Affordability Declines

Affordability for first-time home buyers declined 2.8 percentage points in the second quarter to an index of 77.0, and was 2.0 percentage points below the second quarter 2001 index of 79.0.

The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an estimated income of $29,853, had 77.0 percent of the income needed to purchase a typical starter home with a 10 percent downpayment. The median starter home price was $134,000, during the second quarter.

The index shows a typical entry-level buyer can afford a home costing $103,200. "First-time buyers are in fairly good shape in lower cost markets, concentrated mostly in the Midwest and South, but must often lower their sights and consider creative approaches in higher-cost areas," Edwards said. "On one hand, first-time buyers need to learn about programs designed to help them become homeowners. On the other, we need to continue working with Congress and the administration to expand programs to help lower-income buyers and to provide tax incentives which stimulate the construction of lower-cost housing."

Copyright: National Association of Realtors

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