In the latest edition of CoreLogic's Market Pulse the company's senior
economist Mark Fleming provides a different take on housing affordability which
he says economists are predicting will experience a "shock" in 2014. There is a degree of uniformity in their
predictions, he says, that rising rates, increasing house prices and stagnant incomes
will soon herald the demise of the era of affordable housing.
While Fleming does not argue with the
basic premise he disagrees with the view that that news is "shocking." "As I often point out with most housing
statistics today," he says, "it is less important to focus on the fact that
housing affordability is declining, but rather where it stands relative to
historically normal levels." But beyond
the historical, Fleming also argues that affordability is actually proceeding
along two different tracks, one for existing homeowners and another for those
looking to buy their first home.
Using the same methodology as the
National Association of Realtors® (NAR) and assuming a 20 percent downpayment
and a 25-percent qualifying ratio Fleming constructed his own affordability
index. Using this he says national
affordability was down 17 percent from the previous October and 22 percent from
its peak in January 2013. These declines
are the result of an 11 percent appreciation in the CoreLogic Home Price Index
(HPI) and a 100 basis point rise in interest rates. Yet CoreLogic's affordability measure is 35
percent higher than in 2000 when mortgage interest rates were 8 percent and
home prices were rising more modestly. So
Fleming says, though clearly less accessible than a year ago, housing remains
affordable in the current market."
But that analysis misses an important
point. While affordability can vary by
market is also varies dramatically depending on whether you are a homeowner or
not because homeowners capture price increases in the form of equity. Thus affordability for the first time buyer
is a measure of his income, the interest rates, and the price of homes; a
homeowner's affordability level is functionally unchanged by increases in the
The chart, which is based on a 5 percent
downpayment, shows that during the period of 2003 to 2007, declining interest
rates improved affordability for existing homeowners but that advantage for
first time buyers was more than offset by rising home prices and housing
reached its least-affordable level in 2006.
Then in 2007 the recession took hold, interest rates began their fall to
historic levels, and home prices also declined dramatically, costing existing
homeowners their equity but improving affordability for first-time homeowners,
putting the two groups on near equal footing by the end of 2010.
Fleming said that homeowners have disproportionately
lost affordability again over the last two years; down 17 percent for that
group compared to 6 percent for existing homeowners. And while first time buyers will still find
affordability 35 percent higher than in the early 2000s, affordability for
existing homeowners is almost 100 percent above the average back then as modest
income gains have compounded and rates are still extremely low.
Context and ownership clearly matter
Fleming says. "Will a further rate rise
and increasing prices in 2014 eventually make housing unaffordable? That will depend, but one thing is
clear: First-time homebuyers will be
more significantly impacted."