New Data Shows Home Affordability at Worst Level in 10 Years

Home affordability has been deteriorating over the past two years, and reached its worst level in the third quarter since the eve of the financial crisis of 2008, according to a report released Thursday by a Los Angeles-area analytics company.

ATTOM Data Solutions found the median cost of mortgages, including escrow payments, reached 37% of median wages for the three months ending Sept. 30, up from about 30% in late 2016.

“It’s a sign of how the market is running hot,” said Daren Blomquist, senior vice president at ATTOM Data Solutions.

The rate reached its last high of 38% in 2008’s third quarter, but had been averaging 47% from 2005 through 2007—the heyday of the housing bubble.

Lenders typically require at least 28% of income to mortgage expense, but this housing boom is different than the one 12 years ago, Blomquist said. Then, subprime lenders were pushing people on the edge of affordability into mortgages with no down payments, balloon payments and loose underwriting.

This time, the housing prices are continuing to rise while homeownership rates continued to fall until the last year, when they rose slightly. Homeownership rates have eroded the most among Millennials, who should be the prime market for first time homebuyers.

“This is a different housing boom than a decade ago because it’s not driven by increases in homeownership,” he said. “It’s driven by investors.”

A higher proportion of buyers in recent years are investors who are snatching up homes with plans to rent them out, Blomquist said. For them, median wage trends don’t apply, and they are more resilient to rising interest rates and home prices.

Separately, a study released Tuesday by Arch Mortgage Insurance Company said home prices are likely to rise in every state over the next two years as supply continues to outstrip demand.

Other findings from the ATTOM study include:

• The median home price of $250,000 in the third quarter was 6% higher than a year ago, while average wages rose 3%.
• Median home prices have increased 76% since bottoming out in 2012’s first quarter, while wages rose 17%.
• Prospective homebuyers would need to make $100,000 or more to buy a median-priced home in 69 of the 440 counties analyzed in the report, assuming a 3% down payment and a maximum front-end debt-to-income ratio of 28%.
• Among those counties with high-wage barriers to home ownership, domestic net migration in 2017 decreased in 45 of the counties, or 65% of the 69 counties.
• Domestic net migration in 2017 increased in 64% of the 371 counties where buying a median-priced home requires less than $100,000 in annual income.

“Home affordability is at least one factor driving recent migration patterns,” Blomquist said.

Meanwhile, the Arch MI Risk Index found the probability of home prices falling over the next two years to be unusually low at 6%, up 1 percentage point from the previous quarter due to worsening affordability, particularly in Western states.

The Greensboro, N.C., company issues the quarterly report using a statistical model fed by nine indicators of the health of local housing markets.

The states with the highest risk of having lower home prices in two years are Alaska (26%) and West Virginia (19%) due to the lingering effects of weakness in the energy-extraction sector. “However, risks in these areas are trending down in tandem with higher oil prices,” the report said.

Among larger metro areas, the largest risks of declines are in Houston (22%) and Denver (18%) because home prices there are far higher than expected compared to the historical relationship between prices and incomes.