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Home affordability continues to decline

Mortgage rates hit seven-year highs last month, and home prices are still rising well ahead of inflation and incomes. This has stretched home affordability close to a tipping point.

Housing data suggests numerous cities are unaffordable, particularly for entry-level buyers.  

homepriceafford“Home affordability in the second quarter of 2018 was the worst it’s been in nearly 10 years,” said Daren Blomquist, senior vice president with Attom Data Solutions. According to Attom’s index, the U.S. market on a nationwide basis crossed into unaffordable territory in the second quarter, and nearly 60 percent of the markets it tracks were below their normal affordability levels.

“Rising interest rates this year have accelerated the affordability decline, and we would expect that to continue in Q3 2018 and beyond as interest rates continue to rise, despite some signs that home-price appreciation is beginning to slow down,” Blomquist said.

U.S. home price prices rose by 5.5 percent annually in August, the slowest pace in two years, CoreLogic reported this week. Prices are slowing down, though, because of eroding affordability, according to the company.

The higher rates have made homes too pricey and pushed people out of the market, cooling off sales and the growth in home prices. According to CoreLogic, 38 of the 100 cities its tracks have overvalued housing markets.

The American Enterprise Institute’s Center on Housing Markets and Finance also recently weighed in on affordability. AEI analysts say that affordability is really about how relatively obtainable a home is for people shopping for houses in the lower price tiers. And, according to AEI, the prices have been rising at a much faster rate for the entry-level houses as too many would-be buyers are shopping for too few available homes. This has made it tough for the entry-level buyer almost everywhere.

"Affordability is a relative term," said Ed Pinto, co-director of the Center on Housing Markets and Finance. "Many of the indices say, 'well, housing is affordable because interest rates are so low,' but that is an artificial circumstance."

Pinto said AEI is in the process of ranking the best places to be a first-time buyer based on the median incomes and home prices. He said that when the interest rate is set at a more normal level of 6 percent, the picture isn’t pretty. 

“Houses prices are overvalued in most of the markets in the country, and all of the usual suspects,” Pinto said.

Other analysts paint a less grim picture of affordability.

According to the title insurer First American Corp., in terms of affordability, the U.S. housing market has returned to roughly the year 2008 of the last boom-bust cycle. Real home prices remain far below the super-heated conditions of the 2005-2007 period.

This is consistent with the National Association of Realtors (NAR) affordability index, which suggests that overall home affordability is at the year 2008 level. NAR’s index suggests that homes were at their most affordable in mid-year 2012. Home affordability fell steeply in the latter half of 2012 into early 2013, and has generally declined ever since.

A number of cities remain quite affordable, however. The mortgage insurer Arch MI, for example, recently ranked cites for affordability. Cities with solid wage increases and strong housing markets, and homeowners with relatively low median debt loads [suggesting affordable home prices] ranked high on the affordability list. Fort Worth, Texas; Jacksonville, Florida; and Oklahoma City, Oklahoma, were in the best shape in terms of affordability.

“I do believe that homes, nationally, remain affordable,” said Mark Fleming, chief economist for First American. Unlike a year ago, however, Fleming no longer believes that every market in the country is affordable to a person making the median wage and taking out a 30-year fixed mortgage at the current rates. Fleming mentioned four high-priced California markets — San Jose, Riverside-San Bernardino, San Francisco and Los Angeles — as being at the bottom of the affordability list.

“We believe the San Francisco Bay Area to be highly unaffordable because the rental household earning $135,000 a year with house-buying power of over $800,000 can only afford to buy 20 percent of the homes for sale,” Fleming said. 


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