Affordability Struggle For First Time Buyers…

Explaining The Affordability Struggle for First-Time-Home-Buyers

In the latest edition of CoreLogic's Market Pulse the company's senior economist Mark Fleming provides adifferent take on housing affordability which he says economists are predicting will experience a "shock" in 2014.  There is a degree of uniformity in their predictions, he says, that rising rates, increasing house prices and stagnant incomes will soon herald the demise of the era of affordable housing. 

While Fleming does not argue with the basic premise he disagrees with the view that that news is "shocking."  "As I often point out with most housing statistics today," he says, "it is less important to focus on the fact that housing affordability is declining, but rather where it stands relative to historically normal levels."  But beyond the historical, Fleming also argues that affordability is actually proceeding along two different tracks, one for existing homeowners and another for those looking to buy their first home.

Using the same methodology as the National Association of Realtors® (NAR) and assuming a 20 percent downpayment and a 25-percent qualifying ratio Fleming constructed his own affordability index.  Using this he says national affordability was down 17 percent from the previous October and 22 percent from its peak in January 2013.  These declines are the result of an 11 percent appreciation in the CoreLogic Home Price Index (HPI) and a 100 basis point rise in interest rates.  Yet CoreLogic's affordability measure is 35 percent higherthan in 2000 when mortgage interest rates were 8 percent and home prices were rising more modestly.  So Fleming says, though clearly less accessible than a year ago, housing remains affordable in the current market."

But that analysis misses an important point.  While affordability can vary by market is also varies dramatically depending on whether you are a homeowner or not because homeowners capture price increases in the form of equity.  Thus affordability for the first time buyer is a measure of his income, the interest rates, and the price of homes; a homeowner's affordability level is functionally unchanged by increases in the latter.

The chart, which is based on a 5 percent downpayment, shows that during the period of 2003 to 2007, declining interest rates improved affordability for existing homeowners but that advantage for first time buyers was more than offset by rising home prices and housing reached its least-affordable level in 2006.  Then in 2007 the recession took hold, interest rates began their fall to historic levels, and home prices also declined dramatically, costing existing homeowners their equity but improving affordability for first-time homeowners, putting the two groups on near equal footing by the end of 2010.

Fleming said that homeowners have disproportionately lost affordability again over the last two years; down 17 percent for that group compared to 6 percent for existing homeowners.  And while first time buyers will still find affordability 35 percent higher than in the early 2000s, affordability for existing homeowners is almost 100 percent above the average back then as modest income gains have compounded and rates are still extremely low. 

Context and ownership clearly matter Fleming says.  "Will a further rate rise and increasing prices in 2014 eventually make housing unaffordable?  That will depend, but one thing is clear:  First-time homebuyers will be more significantly impacted."

Best Regards, Chris Mesunas

 

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