Housing affordability conditions remained favorable during the second quarter, but rising interest rates and higher home prices meant affordability declined from the first quarter-which had the second-highest level in 21 years according to the National Association of Realtors.
NAR’s composite Housing Affordability Index was 133.6 during the second quarter of 2004, down 10.5 percentage points from 144.1 in the first quarter and 7.6 points below the same period a year earlier when it stood at 143.8. The first quarter 2003 reading of 144.9 was the highest index since 1973.
David Lereah, NAR’s chief economist, says it’s important to put the decline in perspective.
“Housing affordability conditions for the U.S. as a whole have been so favorable that even with a decline, the current reading is quite good,” he says. “The last time the affordability index was at this level was in the second quarter of 2002, and that was a record year for home sales.”
The index shows the nation’s typical household had 133.6 percent of the income needed to purchase a home at the median existing-home price in the second quarter, which was $183,800. This index measures affordability factors for all homebuyers making a 20 percent down payment, 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 projected to be $54,884.
NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., says the typical household is well poised to buy a home in most of the country.
“The average buyer could afford to buy a home costing nearly 4.5 times their income in the second quarter,” he said. “Even so, the median-income family spends just over 3.3 times their income for a home, meaning housing continues to be an excellent investment. Affordability conditions are expected to be fairly stable during the second half of the year, which will contribute to a new annual record for home sales.”
In the second quarter, a median-income household could afford to buy a home costing $245,600, which is well above the national median price of $183,800.
According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 5.73 percent during the second quarter, up from 5.64 percent in the fourth quarter and up from 5.58 percent in the second 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.
Affordability for first-time homebuyers also declined in the second quarter, down 6.4 percentage points to 77.0 from a reading of 83.4 in the first quarter. It was 5.9 points below the second 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 $31,103, 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 $156,200 during the second quarter.
The index shows the typical first-time buyer could afford a home costing $120,300.
“First-time buyers are in a fairly good position in most of the midsection of the country, but in higher priced markets they have to make some adjustments,” McDonald says. “In reality, entry level buyers are making smaller downpayments-in the range of 3 to 6 percent-and are using loan programs to afford more house for a given income.”