The Real Deal

Indicators combine to make homes affordable

More Americans are grabbing onto their dream of owning a home thanks to increased affordability factors. Low mortgage interest rates, rising family income and a seasonal dip in the median existing-home price all combined to improve housing affordability conditions in the fourth quarter, according to the National Association of Realtors.

The association's composite Housing Affordability Index was 146.8 during the fourth quarter of 2001, up 9.4 percentage points from 137.4 reported in the third quarter. The index was 13.4 points above the same period a year earlier, when it stood at 133.4, and is the highest since 1973, when it reached 147.9.

The index shows the nation's typical household had 146.8 percent of the income needed to purchase a home at the fourth quarter median existing-home price, which was $148,000. This index measures affordability factors for all home buyers making a 20 percent down payment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home. The fourth-quarter median family income was $53,914, which would qualify to buy a home costing $217,300.

National Association of Realtors President Martin Edwards Jr. said excellent housing affordability conditions contributed to a record year for home sales. "Low interest rates have been opening the door to low- and moderate-income buyers, allowing many new families to become homeowners," he said. "Immigrants and minorities are a significant portion of the entry-level market--when they can achieve the American dream of homeownership, it allows existing owners to sell their homes and boosts all segments of the market."

David Lereah, the association's chief economist, said favorable affordability conditions and strong sales contributed to an upturn in economic growth during the fourth quarter. "For some time we've been saying that housing has been shouldering the U.S. economy--we believe that direct and indirect spending related to the strong level of home sales was a key factor in the 0.2 percent annual growth rate in the gross domestic product during the fourth quarter," he said. "However, we believe it's important for Congress to pass an economic stimulus package to get the economy growing at a more sustainable pace."

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 6.71 percent during the fourth quarter, down from 7.06 percent in the third quarter; it was 7.81 percent in the fourth quarter of 2000. This is a weighed average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

Affordability for first-time home buyers also improved, rising 5.2 percentage points in the fourth quarter to 85.2; it was 6.5 points above the fourth quarter 2000 index of 78.7.

The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $36,720, had 85.2 percent of the income needed to purchase a typical starter home with a 10 percent down payment. The median starter home price was $125,800, during the fourth quarter, and the median-income first-time buyer could afford a home costing $107,200.

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Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.siliconvalley-realtors.org. Send questions on any topic to jnewton@jnpr.com.

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