Freddie Mac's December U.S. Economic & Housing Market Outlook looks at what the company's chief economist Frank Nothaft and deputy chief  Leonard Kiefer call "diverging homebuyer affordability", that is affordability that depends to a large extent on the part of the country in which one lives.

In June of this year the Outlook reported on how rising interest rates would affect homebuyer affordability and found that most markets were affordable and that rates would have to rise to about 7 percent before they became unaffordable to a typical family.  Six months later interest rates are up by about a half point and prices have been rising nationwide so Outlook took a second look to see how housing affordability looks now and what it might look like in the future.

The economists say that mortgage rates are key to affordability and by the end of September that affordability had eroded in many parts of the country from where it was in March.  Several of the largest markets on the coasts, representing about 28 percent of the households in Freddie Mac's data, had become unaffordable.  Affordability is measured by the percentage of households who could afford to buy a median priced home while earning the median income for the area.  If rates increase to 5 percent, then two-fifths of the metro areas would become unaffordable while in much of the Midwest and South affordability would remain high.


Freddie Mac has created the interactive map above to show how affordability could be affected at different rates.   At a 4.4 percent rate for a 30-year fixed rate mortgage, the prevailing rate in the third quarter, all of the North Central Region remained affordable while just 36 percent of the West did.  When the maps parameters are changed to reflect a 5 percent rate (with no change in prices or income) approximately 63 percent of the country would be affordable; at 6 percent mortgage rates 55 percent would be affordable; and at 7 percent only 35 percent of the country (but 64 percent of the North Central region!) would be affordable.

Income growth may be partially able to offset any rise in mortgage payments and there has been recent good news.  Job growth in October and November beat the consensus forecast with job growth increasing at a monthly pace of 193,000 over the past 3 months.  These are better paying jobs as well and the unemployment rate is down to 7 percent and there has been an encouraging increase in job openings.  

Having housing payments fall relative to income is not only good for potential home buyers but for sustaining homeownership for existing owners.  Housing payment-to- income   ratios   have moved sharply  lower  over  the  past few years, and currently are at the lowest level since 1980, when  the  Federal  Reserve began  to  keep  track  of  the ratio. Relatively low, manageable ratios are critical, Nothaft and Kiefer say, for homeowners to have a successful, sustained homeownership experience.



The Federal Reserve's Flow of Funds data for the third quarter of 2013 shows that household wealth is also increasing because of gains in both the stock market and house prices, rising $1.9 trillion in the third quarter of 2013 from the second quarter of 2012. Residential real estate holdings increased by $428 billion in the third quarter, while equities and mutual funds added $917 billion. Home mortgage debt expanded for the first time since early 2008, up by 1 percent in the third quarter, and is a positive sign that new mortgage loans are exceeding charge-offs on defaulted debt.

Freddie Mac's economists say that all eyes will be on the 'Taper' in the coming months of 2014 and without a doubt it will be the quintessential factor in mortgage rate swings.  "But mortgage rates are just one factor in the affordability equation, and other fundamentals, such as income growth, will be those that help create a stable and sustainable environment for attaining homeownership."