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

In the latest edition of CoreLogic’s Market Pulse the company’s seniorrneconomist Mark Fleming provides a different take on housing affordability whichrnhe says economists are predicting will experience a “shock” in 2014.  There is a degree of uniformity in theirrnpredictions, he says, that rising rates, increasing house prices and stagnant incomesrnwill soon herald the demise of the era of affordable housing.  </p

While Fleming does not argue with thernbasic premise he disagrees with the view that that news is “shocking.”  “As I often point out with most housingrnstatistics today,” he says, “it is less important to focus on the fact thatrnhousing affordability is declining, but rather where it stands relative tornhistorically normal levels.”  But beyondrnthe historical, Fleming also argues that affordability is actually proceedingrnalong two different tracks, one for existing homeowners and another for thosernlooking to buy their first home.</p

Using the same methodology as thernNational Association of Realtors® (NAR) and assuming a 20 percent downpaymentrnand a 25-percent qualifying ratio Fleming constructed his own affordabilityrnindex.  Using this he says nationalrnaffordability was down 17 percent from the previous October and 22 percent fromrnits peak in January 2013.  These declinesrnare the result of an 11 percent appreciation in the CoreLogic Home Price Indexrn(HPI) and a 100 basis point rise in interest rates.  Yet CoreLogic’s affordability measure is 35rnpercent higher than in 2000 when mortgage interest rates were 8 percent andrnhome prices were rising more modestly.  SornFleming says, though clearly less accessible than a year ago, housing remainsrnaffordable in the current market.” </p

But that analysis misses an importantrnpoint.  While affordability can vary byrnmarket is also varies dramatically depending on whether you are a homeowner orrnnot because homeowners capture price increases in the form of equity.  Thus affordability for the first time buyerrnis a measure of his income, the interest rates, and the price of homes; arnhomeowner’s affordability level is functionally unchanged by increases in thernlatter. </p

The chart, which is based on a 5 percentrndownpayment, shows that during the period of 2003 to 2007, declining interestrnrates improved affordability for existing homeowners but that advantage forrnfirst time buyers was more than offset by rising home prices and housingrnreached its least-affordable level in 2006. rnThen in 2007 the recession took hold, interest rates began their fall tornhistoric levels, and home prices also declined dramatically, costing existingrnhomeowners their equity but improving affordability for first-time homeowners,rnputting the two groups on near equal footing by the end of 2010.</p

Fleming said that homeowners have disproportionatelyrnlost affordability again over the last two years; down 17 percent for thatrngroup compared to 6 percent for existing homeowners.  And while first time buyers will still findrnaffordability 35 percent higher than in the early 2000s, affordability forrnexisting homeowners is almost 100 percent above the average back then as modestrnincome gains have compounded and rates are still extremely low.  </p

Context and ownership clearly matterrnFleming says.  “Will a further rate risernand increasing prices in 2014 eventually make housing unaffordable?  That will depend, but one thing isrnclear:  First-time homebuyers will bernmore significantly impacted.”

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