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Housing Affordability Chalks Biggest Drop Since Second Quarter of 2004

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I’ve brought up the issue of housing affordability several times over the past year, and things don’t appear to be getting any better on that front.

The latest piece of bad news comes from the National Association of Home Builders, which released its Housing Opportunity Index (HOI) late last week.

The HOI measures what percentage of homes sold in a given area are affordable to families earning the corresponding area’s median income during a specific quarter.

During the third quarter, only 64.5% of new and existing homes sold were deemed affordable to families earning the national median income of $64,400.

That number is down from 69.3% in the second quarter, marking the largest quarterly HOI decline since the second quarter of 2004.

The index peaked in the first quarter of 2012 with 77.5% of American households able to afford the median priced $162,000 home.

Since then, there’s been a pretty steady decline as home prices seemed to hit bottom and then surge upward.

Higher Home Prices and Rising Mortgage Rates the Culprit

The ongoing problem in the housing market (assuming you’re not already an owner) is higher home prices coupled with rising mortgage rates, two trends that don’t appear to be changing anytime soon.

The median price paid for a home increased to $211,000 in the third quarter from $202,000 a quarter earlier.

Meanwhile, interest rates on the 30-year fixed mortgage jumped from 3.73% to 4.45%, which further dented affordability.

Back in the first quarter of 2012, the median price was $162,000 and fixed mortgage rates averaged around 4.32%.

So mortgage rates alone aren’t actually much of a problem. But when you consider the fact that home prices have risen around 30%, the same low mortgage rate just won’t cut it for some families.

If the Fed wants to keep the party going, it would have to drive mortgage rates down even lower to keep affordability at recent highs.

Crisis Levels Are Still a Few Years Away, Hopefully…

Still, we aren’t nearly as bad as we were before the entire housing market unraveled.

In much of 2005, 2006, and 2007, just over 40% of American households could afford the median priced home.

In fact, there was a point when the number nearly dipped into the high-30% range. At that time, home prices were closer to $250,000 and 30-year fixed mortgage rates were nearly 7%.

So one could argue that things aren’t too bad, yet. But we’re already starting to see bubbly characteristics, like arguments to go with an ARM instead of a fixed mortgage.

The ARM-share of mortgage applications is still low, but it will likely inch up as home prices and fixed rates continue to rise.

At the same time, lenders will probably come up with clever new products to boost affordability, and before you know it, we’ll be back to square one.

For the record, the California Association of Realtors also released its housing affordability indices last week.

Their “Traditional Housing Affordability Index” (HAI) revealed that just 32% could purchase a median-priced, existing single-family home in the Golden State during the third quarter, down from 36% in the second quarter and 49% a year earlier.

In the San Francisco Bay Area, only 21% of households could afford to buy a home, compared to 35% in the third quarter of 2012.

Statewide, it’s the first time the HAI has been below 35% since the third quarter of 2008. Affordability peaked at 56% in the first quarter of 2012.

This is worrisome, given how low mortgage rates continue to be. But with a lack of inventory, there’s no reason home prices shouldn’t continue their meteoric rise.

The question is when do we hit that tipping point where everyone tries to sell at the same time?

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