Freddie Mac released its insight containing factors and perceptions of consumers about homeownership in the U.S. The report covering July 2017 looks into the disconnect between affordability of homes based on rising national indices and sentiment of consumers feeling that buying a home seems out of reach.
“Thanks to very low mortgage rates, monthly mortgage payments are affordable for the average household despite currently-high house prices. Nevertheless, hurdles to homeownership arise from the difficulty of finding a house,” Sean Becketti, chief economist at Freddie Mac, said in a statement accompanying the GSE’s Insight for July 2017.
Factors That Make Homebuying Feels Unaffordable
What the Indices Could Have Missed
The Freddie Mac Insight noted that the Housing Affordability Index (HAI) by the National Association of Realtors (NAR) has been rising steadily for almost four decades, reaching a record-high in 2012. Various headlines also pointed to housing being affordable.
Still, there is a perception of unaffordability. What could have those indices missed?
Home prices vs income
What tops the list is house prices, which according to the research, are now higher than their peak during the housing boom. House prices have risen 6% on an average per annum since their price trough in 2012 and show no signs of slowing down.
Compare this with per capita income that rises on an average of 2.4% every year.
This disproportionate rise of income versus home prices is illustrated best in the affordability of homes in local markets. Take for example three California counties – San Francisco, Marin and San Mateo – where the median-income household is unlikely to qualify for a mortgage on a median-priced home in all ZIP codes in those counties. The opposite can be said in the Kansas City metropolitan area where a household earning median income can afford a median-priced home in all but three ZIP codes.
Supply of homes
Another factor is the availability of homes, in terms of inventory. This is especially true for starter homes. Per the research, housing starts fell in 2009 at 550,000 – below the historical average of 1.5 million starts per year. This year is no different with construction starts estimated to be less than 1.3 million.
This mismatch between the supply and demand for homes pushes their prices to go up. “The limited supply of available homes increases the perception that homes are unaffordable,” Freddie Mac said.
Even when a consumer can afford, the question is: can he/she qualify for a mortgage? Since the Great Recession, lending standards have tightened.
“And underwriting requirements are more rigorous than they were in the past. Many potential first-time borrowers are stymied by variable employment and income histories and the challenge of accumulating a down payment while simultaneously paying down their student loans. In fact, a high level of household debt, particularly student debt, poses perhaps the largest obstacle to first-time homebuyers,” Mr. Becketti pointed out.
Cost of ownership
It doesn’t end with qualifying a mortgage and many first-time homebuyers are caught unaware of costs it takes to maintain their homes. From Hawaii to New Jersey, property taxes go as low as 0.3% to as high as 2.1%. Maintaining a home can cost 1% of its home price on an average every year.