Affordability Declines as Home Prices Rise

While many Americans still believe in homeownership, being able to afford a home is another issue. According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), affordability is declining as home prices rise in most areas of the country. Down to 69.3% for the second quarter of the year from 73.7%, this is the first time since late 2008 that the level has dropped before 70%.

Housing affordability has been at historic highs due to low home prices and low mortgage rates for the past several years. Increasing home values represent an improving housing market, however, now that mortgage rates have risen slightly above historic lows, the combination of both has reduced the number of consumers that can afford to purchase a home.

While affordability is one thing, being able to receive loan approval is another issue. With the stricter guidelines and higher insurance fees imposed by the Federal Housing Administration, FHA mortgages have become more difficult for many low to middle income borrowers to obtain. According to the Mortgage Bankers Association's Market Composite Index for the week ending August 9th, the Purchase Index fell 5% on a seasonally adjusted basis. Of this, the government portion of applications is down to 29%. This is way below the long term average of 38%.

As affordability continues to fall, many homeowners will choose to stay in their current homes instead of moving up. In addition, many homeowners who have already refinanced to historically low mortgage rates may opt to stay right where they are since affordability is in their favor. Mortgage refinances have also been hit hard since rates have increased slightly over the past two months. In the same MBAA report, refinance applications dropped 4% from the previous week.

On the other hand, increasing home prices may make it possible for a whole new group of homeowners, those who could not do so due in the past, to refinance at slightly higher rates. The Mortgage Bankers Association reported that the Mortgage Credit Availability Index rose for the fourth straight month to 112.3 in July. However, when compared to 2007 when the index would have been at 800, lending remains tight even as lenders make credit more available.

All efforts are being made to keep the housing recovery on track at this time. The FHFA is pushing a campaign to educate homeowners about the HARP refinance program which has been extended to the end of 2015. Even though home prices have increased, there still remains many underwater mortgages in certain areas of the country. As of March 2013, 2.4 million HARP mortgages have been completed.

Higher priced homes, those above the conforming loan limits, have been changing hands at a brisk pace this year. According to DataQuick, a real estate information company, sales of homes that are priced above $1 million rose an average of 37% during the first half of 2013 and are at the highest level since 2007. Jumbo loan rates remain competitive and still much lower than years ago which has added to the affordability and surge of sales in this high end sector of the market.

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