Photo: Robert Clark
Housing affordability in the US sank to new lows as fall homebuying season got underway.
Home prices in the third quarter of 2018 were at the least affordable level since the third quarter 2008 — a new 10-year low. And the market isn’t expected to improve anytime soon, according to a new report by ATTOM Data Solutions.
“Affordability will likely get worse at least over the next year as the market momentum fueled by low inventory of homes available will continue to push prices up faster than wages,” ATTOM senior vice president Daren Blomquist tells Livabl.
The report calculates an affordability index based on percentage of income needed to buy a median-priced home relative to historic averages. A reading above 100 indicates median home prices are more affordable than the historic average, and an index below 100 indicating median home prices are less affordable than the historic average.
Nationwide, the home affordability index read 92 at the end of the third quarter, down from an index of 95 in the previous quarter and an index of 102 in the third quarter of 2017.
This was the lowest level since the third quarter of 2008, when the index was at 87.
Median home prices rose faster than wages in 86 per cent of local markets in the third quarter of 2018. The national median home price of $250,000 in the third quarter was up 6 percent from a year ago and twice the annual growth of 3 percent in average wages.
At the national level, the average wage earner would need to spend 37 per cent of their income to buy the typical home in the third quarter of 2018 — above the historic average of 34.1 per cent.
And at the metro level, the highest share of income needed to buy a home was in Brooklyn, New York, where average wage earners would need to spend nearly 135 percent of their income on buying a home in the pricey borough.
Rising national interest rates is the chief cause of eroding housing affordability, but stagnant wages and population migration are also playing a strong supporting role.
“Wages really are the passive factor in all of this. If wages had risen faster, home prices probably would have also been pushed up faster as well, still resulting in the home price growth-wage growth disconnect that has eroded affordability,” says Blomquist.
According to Blomquist, the more underlying root cause of the affordability crunch is the imbalance of supply and demand — at least in the markets where jobs and population are moving.
Over the last several years, an interesting migration element relative to housing demand emerged — people are moving out of high-priced areas, like Coastal California, and moving to more affordable markets, like Las Vegas, Nevada. The migration is driving up demand and prices in these destination markets.
“That domestic migration demand is resulting in low affordability relative to historic norms in those middle-America markets,” says Blomquist.
Homebuyers shouldn’t give up hope just yet. Relief, albeit a few years off, could be on the way.
“There are signs the market is beginning to respond in the form of slowing home price appreciation, which will eventually bring some affordability relief, but it may take a couple years to get there,” says Blomquist.
There is also a bit of a be-careful-what-you-wish-for angle on slowing price appreciation, in that if the market cools too quickly, it could evolve into a correction— or worse, a crash.
“That would improve affordability, but it could have other harmful ripple effects on the housing market and overall economy,” says Blomquist.
Click here to read the entire report.