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Millions could be priced out of the new-home market

It is a matter of debate among economists as to how relatively unaffordable the U.S. housing market has become, but a new study from builders suggests that it won’t take much to price out millions of Americans from the market for new homes.

The National Association of Home Builders (NAHB) estimated that a mere 25 basis-point increase in the mortgage rate would knock out around one million potential homebuyers across the U.S., while a $1,000 increase in the median home price would push out an estimated 127,560 households.

newhomemarketNAHB does this modeling to demonstrate the impact that even small changes in project costs can have on new-home demand.

“There are all kinds of different entities — governments at different levels, code officials — proposing things that increase the cost of producing a new home, and just ignore the cost implications,” said Paul Emrath, vice president of surveys and housing-policy research at NAHB.

“On a home that starts out costing $300,000 to $400,000, that $1,000 might not seem like much, but at the margins, there are some people who that will affect,” Emrath said during an interview.   

NAHB says a home remains affordable so long as a household is not required to use more than 28 percent of its gross monthly income on housing costs.

The trade group’s modeling starts with an assumed 10 percent downpayment, a baseline mortgage rate of 4.85 percent and a typical mortgage-insurance premium of 73 basis points.

The model also assumes combined property taxes and home insurance at $16 per $1,000 of home value. In other words, an annual expense of roughly $5,680 for property taxes and insurance for a U.S. median-priced new home at $355,138.

Using these assumptions, NAHB said 32.7 million households could afford U.S. median-priced new home; however, those numbers start to decline significantly with just small increases in the interest rate. For example, if the rate were to rise to 5.1 percent from 4.85 percent, it would price out over one million people, NAHB said. If the rate rose a full percentage point to 5.85 percent, some 4.1 million households would be priced out.

According to Freddie Mac data, interest rates have been moving down in recent weeks. Freddie reported last week that the 30-year fixed-rate mortgage averaged 4.51 percent. Some forecasts have mortgage rates topping 5 percent in 2019, however.

NAHB also examined what could happen if median prices for a new home rise by $1,000. Nationwide, more than 127,000 people, on average, would be priced out of the market for each incremental $1,000 increase in a home prices. As prices rise beyond the first few incremental $1,000 increases, the number of affected households would start to drop because the pool of potential buyers is smaller, NAHB said.   

In individual states and cities, the numbers vary depending on the population and the cost of homes. In general, cities and states with large populations, and thus a bigger pool of potential buyers, would be more affected by small changes in prices, according to NAHB.

Texas would have the largest number of households priced out of the homebuying market by a $1,000 increase in home prices, at 11,152 households. Following Texas are California (9,897) and Ohio (7,341). Among metro areas, Houston and Chicago would see the largest number of people priced out of the market with a $1,000 change in home prices, NAHB said.  


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