Housing affordability declined considerably during the third quarter of 2013, particularly in larger metropolitan areas on both the East Coast and West Coast where median property values have risen to pre-recession heights or higher.
According to the most recently released Housing Opportunity Index from the National Association of Home Builders/Wells Fargo 64.5 percent of new and existing homes sold from July through September were within the range of affordability for households earning the median income of $64,400 annually. That figure represents a decline of nearly 5 percent from the affordability rate seen during 2013's second quarter, and the largest percentage decrease since the second quarter of 2004.
A convergence of factors
NAHB Chief Economist David Crowe attributes the decline in affordability primarily to steadily climbing - in some cases to unprecedented levels - property values in metro areas, as well as mortgage interest rates that have risen sporadically, in part because of the expectation that the Federal Reserve will eventually taper its $85 billion-per-month bond-buying program. There's also the matter of inventory, as the current level of supply lags behind the demand, particularly in pricey markets like Boston, New York and San Francisco where there is simply little room left for expansion because of the cities' natural geographical boundaries. Until more new construction begins, inviting new buyers into the market, prices in those metro areas will remain high.
"The decline in affordability is the result of higher mortgage rates and the more than year-long steady increase in home prices," said Crowe in a statement that accompanied the index's release. "While affordability has come down from the peak in early 2012, the index still means a family earning a median income can afford 65 percent of homes recently sold. Some of the decline in the affordability index could be the result of a loss in some more modest priced home sales as tight underwriting standards have limited the purchases by moderate income families."
The point Crowe makes alluding to relative affordability is important, since the highest rates of appreciation have mostly been confined to markets like the Bay Area, Boston, Los Angeles, New York and San Diego. Those areas are notoriously expensive anyway, and the price increases have come mostly at the high end on properties that are only targeted by a select buying demographic.
For the fourth consecutive quarter, the California metro area defined by NAHB as San Francisco-San Mateo-Redwood City ranked as the least affordable in the country, based on its residents' median income of $101,200. Only 16 percent of area homes sold during the third quarter were deemed affordable by that measure. Three other California metro areas, the Los Angeles-Long Beach-Glendale region, the nearby Santa Ana-Irvine-Anaheim region and the San Jose-Sunnyvale-Santa Clara region, joined greater New York City - extending to White Plains, N.Y., and Wayne, N.J. - as the five least-affordable markets.
Of smaller metro housing markets, all five at the bottom of the affordability scale were in the Golden State, as well, with the Santa Cruz-Watsonville area ranking lowest thanks to 20.3 percent of its new and existing homes being deemed affordable to residents with a median income of $73,800.
"Housing affordability is being negatively affected by a 'perfect storm' scenario," said NAHB Chairman Rick Judson, a home builder from Charlotte, N.C. "With markets across the country recovering, home values are strengthening at the same time that the cost of building homes is rising due to tightened supplies of building materials, developable lots and labor."
Making markets more affordable
Certain metro areas - both smaller and larger - remain very much within their residents' means. Greater Indianapolis and greater Syracuse, N.Y., tied as the two most affordable larger metro markets, each with 93 percent of their existing and new homes sales falling in the price ranges of locals' median incomes of $65,100 and $65,800, respectively. The other larger markets ranking in the top five in terms of affordability were: Youngstown-Warren-Boardman, Ohio/Pa., Harrisburg-Carlisle, Pa., and Buffalo-Niagara Falls, N.Y.
Kokomo, Ind., claimed the top spot both overall and in terms of smaller markets, with 96.9 percent of third-quarter home sales affordable for its residents, who earn a median income of $60,100.
In the event the Fed decides to scale back its purchasing program, that decision will likely coincide with another surge in employment growth and other signs of overall economic improvement. That means a surge of new construction could theoretically accompany - and essentially negate - any rise in interest rates as a result of the tapering. Those remain the two primary factors capable of pushing the affordability needle - one by expanding the amount of available inventory and thereby cooling prices, the other through increased burden on the homebuyer. Which ends up having a greater impact on the national market depends largely on timing.