A decline in housing affordability

Money downward

Last week, the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) was released with stats for the third quarter of 2013. The HOI as defined by YCharts.com is:

“…a measure of the affordability of homes. It is defined as the percentage of homes sold in an area that would have been considered affordable for a family earning the median income based on standard mortgage underwriting criteria.”

To gather the data for the index, NAHB uses both income and housing cost. They get their income numbers for metropolitan areas from the Department of Housing and Urban Development. Then they use 28% of gross income as the amount they believe a family can afford to spend on housing.

This quarter’s HOI showed that the affordability of housing has gone down. It is believed this is due to the increases in housing prices and interest rates in metro areas throughout the nation. The index indicated that of all new and existing homes sold from July through September of this year, 64.5% of these homes were considered affordable to those earning a median income of $64,000. This percentage is down from the second quarter’s numbers of 69.3%. A decrease this big hasn’t been seen since quarter two of 2004.

house calculator

The Chairman of NAHB, Rick Judson, stated:

“Housing affordability is being negatively affected by a ‘perfect storm’ scenario. With markets across the country recovering, home values are strengthening at the same time that the cost of building homes is rising due to tightened supplies of building materials, developable lots and labor.”

As well, NAHB Chief Economist, David Crowe, said:

The decline in affordability is the result of higher mortgage rates and the more than year-long steady increase in home prices. While affordability has come down from the peak in early 2012, the index still means a family earning a median income can afford 65 percent of homes recently sold. Some of the decline in the affordability index could be the result of a loss in some more modest priced home sales as tight underwriting standards have limited the purchases by moderate income families.”

So rising prices of homes, increased interest rates, rising costs of building homes, and the tightening of lender underwriting standards have all led to the slip in affordability of homes.

Here are the most and least affordable housing markets in the nation according to the HOI:

The most affordable major housing markets:
A tie for the number one spot was between:
1. Indianapolis-Carmel, Indiana
1. Syracuse, New York

2. Youngstown-Warren-Boardman, Ohio-Pennsylvania
3. Harrisburg-Carlisle, Pennsylvania
4. Buffalo-Niagara Falls, New York

The least affordable major housing markets:
1. San Francisco-San Mateo-Redwood City, California
2. Los Angeles-Long Beach-Glendale, California
3. Santa Ana-Anaheim-Irvine, California
4. New York-White Plains-Wayne, New York-New Jersey
5. San Jose-Sunnyvale-Santa Clara, California

(Sources: NAHB, RISMedia, YCharts)

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