Affordability Remains
About the only bright spot during the worse of the recent “troubles” was housing’s affordability. There are several indices that regularly measure it, all based on median home price–the point at which half of homes sold were priced lower and half higher–and median income. The prevailing interest rate and presumptions about downpayment and typical purchasing parameters are also factored in.
Black Knight Financial Services (BKFS), a division of Fidelity Investments, recently reviewed pre- and post-crash affordability. It then projected the topic forward in light of increasing prices and potentially higher interest rates.
The usual rule of thumb for affordability is that housing payments should not consume more than one-third of a household’s income. In the third quarter of 2000 the principal and interest payment on a median priced home was $921 per month, 26% of a median household income. When prices peaked in 2006, monthly payments topped out at $1,308, reaching that 33% level.
Then came the crash and home prices plummeted; monthly payments dropped to $770 in 2012 or 13%, half the portion of income consumed 12 years earlier. Since then home prices have risen from a median of $154,600 in January 2012 to 228,700 in May 2015.
So has the affordable house vanished? Not at all. Black Knight estimates that today’s median mortgage payment is $910, slightly fewer dollars than in 2000, or 21% of median household income, down five% from 15 years before. Not only that, but looking forward they see a lot of room before housing costs reach the 1/3 mark again.
Using an annual increase in median home prices and interest rates of 3% and 75 basis points respectively, BKFS sees monthly P&I payments reaching $1,026 by the third quarter of 2016 and jumping to $1,151 by the same quarter in 2017, increasing from the current level by $116 next year and $241 per month a year later. As a percentage of monthly income that takes housing costs back up to 27% by 2016, one point higher than at the turn of the century and without factoring in rising wages.
BKFS notes that interest rates have a higher impact on affordability than home prices. In its analysis, a 1% increase in rates would have the same effect as a 13% jump in home prices.
Remember also that by definition half of households will buy lower priced homes while half earn more than the median. Whether a homeownership is “affordable” then, has to be an individual decision based on individual information, not an unrelated statistic.