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Residential Department: DataDecoded: March 2017

 

DataDecoded

Rising rates are exacerbating home-affordability woes

Buying is still more affordable than renting in most markets across the country, but the affordability scales are quickly tipping in favor of renting as mortgage rates rise in the wake of the U.S. presidential election.

In the weeks following the election this past November, the average fixed rate for a 30-year mortgage increased 85 basis points, from 3.47 percent as of Oct. 27 to 4.32 percent as of Dec. 29, according to the Freddie Mac Primary Mortgage Market Survey. An analysis of buy-versus-rent affordability in 540 U.S. counties by Attom Data Solutions shows this upswing in mortgage rates moved 55 counties nationwide (10 percent) from being more affordable to buy to being more affordable to rent.

Prior to the mortgage-rate rise, in 354 of the 540 counties analyzed (66 percent), it was more affordable to buy a median-priced home with 3 percent down than to rent a three-bedroom home. After the rate rise, it was more affordable to buy than rent in 299 of the 540 counties analyzed (55 percent).

This shift likely will have a chilling effect this year on home sales in the affected counties. A case in point is San Bernardino County, in the so-called “Inland Empire” of Southern California. Prior to the mortgage-rate jump near the end of 2016, median house payments — including mortgage, property taxes and property insurance — on a median-priced home of $320,000 would require 44.5 percent of an average wage-earner’s income.

r_2017-03_datadecoded_chart

Although pushing the limits of affordability even before the rise in mortgage rates, San Bernardino County was still quite affordable compared to nearby coastal Orange County, where a median-priced home of $625,000 required 80.9 percent of an average wage-earner’s income. And buying was still more affordable than renting a home in San Bernardino County, where the Department of Housing and Urban Development fair-market rent of $2,249 per month for a three-bedroom home requires 46 percent of average wages.

With the rise in mortgage rates, however, that same $320,000 median-priced home in San Bernardino County now requires 48.0 percent of average wages, less affordable than renting and firmly putting a median-priced home out of reach for the average wage earner — given the maximum debt-to-income (DTI) ratio of 43 percent allowed for a qualified mortgage under Consumer Financial Protection Bureau (CFPB) rules.

Viewing home affordability through the prism of that 43 percent DTI ratio, the Attom analysis shows that median-priced homes in one-third of housing markets analyzed (177 out of the 540 counties) are now out of reach for the average wage earner with the recent rise in mortgage rates. That’s up from 26 percent of housing markets (139 out of 540 counties analyzed) where a median-priced home required more than 43 percent of an average wage-earner’s income before the rise in mortgage rates.

If interest rates jumped another 85 basis points in 2017 as they did in late 2016, it would make renting more affordable than buying in the majority of counties analyzed in the ATTOM report — even with no increase in median home prices. With a 5.17 percent mortgage rate, the monthly payment on a median-priced home would be more affordable than renting in just 233 of the 540 counties analyzed (43 percent).

Rising interest rates are clearly tipping the affordability balances away from homebuying and toward renting in a growing number of local U.S. housing markets. Although that shift could result in a short-term buying frenzy triggered by buyers who want to beat out even further rate increases, in the long term it will have a chilling effect on financed home purchases in many local housing markets — particularly high-priced markets.


 

Daren Blomquist is senior vice president at Attom Data Solutions. With Attom Data Solutions since 2001, he is the company’s primary media spokesperson and an expert on the housing market. Blomquist is executive editor of the company’s award-winning Housing News Report and creates comprehensive real estate reports cited by thousands of media outlets and referenced by numerous entities, from local real estate investment clubs to multinational corporations, universities and federal, state and local government agencies. Reach him at daren.blomquist@attomdata.com.

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