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Housing affordability is waning, report shows

The price of U.S. homes has never been higher, according to leading market indices, but analysts are not in agreement about the relative affordability of the U.S. housing market. Some say swaths of the country are entering bubble territory. Others says practically no housing market can be called overpriced when wage growth and still-low mortgage rates are factored into the equation.

A growing body of data, however, points to a problem with affordability in the market for modest-priced homes that first-time homebuyers and people earning an average wage might buy. 

creditreport(1)“For the average American making an average wage, I would say that the majority of the country is unaffordable,” said Daren Blomquist, vice president of Attom Data Solutions. “There are still people buying homes, of course, but those are people making more than the average wage, or dual income folks,” he told Scotsman Guide News. “This is showing that it is not just the coasts that are having affordability issues. It is a lot of these inland markets that are facing it for the average wage earner.”

In a report released Thursday, Attom estimated that 304 out of 446 counties that it tracks, or 68 percent, were unaffordable to people earning the average weekly wage in that county as estimated by the U.S. Department of Labor. Attom's study assumed people were buying a median-priced home with a 3 percent downpayment.

A market is dubbed unaffordable if homeowners have to spend more than 28 percent of their income on their monthly mortgage payments, insurance and property taxes. The 28 percent figure is significant  because it is the maximum “front-end” debt-to-income level recommended by lenders.

Attom also found that the overall U.S. market is unaffordable by this standard. The median home price of $229,500 would require an annual gross income of $57,009, which is higher than the $54,847 average U.S. wage.

Other recent studies suggest the average wage earner has been pinched by this housing market. Realtors have noted an especially severe shortage of homes at lower price points. The tight inventory has been driving up the cost of houses in the bottom price tiers at a much faster clip than the national average, according to Black Knight.

In the lowest price tier, home prices have been appreciating at an annual rate of 8.5 percent, according to Black Knight, which is roughly 2 percentage points higher than the overall annual rate. Although home prices remain broadly affordable and above the historic average, Black Knight data suggests the overall affordability of the U.S. market sunk to its lowest point since at least 2009 to begin the year.

Some analysts, however, are holding firm to their assessment that the entire market remains affordable, although less so than six months ago. The title insurer First American Corp. estimated that home prices on a national basis only increased by 2.3 percent in the year through January, when wages and mortgage rates are factored. First American estimated that home prices remain roughly 14 percent lower than the January 2000 level. 

“By historical standards, using our real house price index, I don’t believe there are any markets that we track that are yet unaffordable," First American's Chief Economist Mark Fleming told Scotsman Guide News. "Although, rising interest rates and home prices are both reducing affordability levels,” he said. 

Moving out of high-cost cities

Blomquist said one “early warning” sign that the market is becoming too pricey is that people begin migrating out of high-cost counties.

U.S. Census Bureau data suggests eight of the top 10 counties with the highest median home prices saw more people leave these counties than move into them last year. Net losers included the county seats of Brooklyn, San Jose, Manhattan and Orange County, California.

In southern California, people have likely been pushed out of pricey coastal Orange and Los Angeles counties into the neighboring Riverside county. Both Orange and Los Angeles counties had net losses in in-migration last year, whereas Riverside posted the third highest net population gain in the country, Blomquist said. LA residents have also been moving to more affordable cities, such as Dallas and Phoenix.

“What we are starting to see in the ultra high-priced markets is much more of a big red warning flag, which is that home prices have hit a point where not only average wage earners can’t afford it, but probably the majority of folks living there can’t afford it,” Blomquist said. “So, you do start to see some of that outward migration.That, to me, is definitely the bigger warning sign." 


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