It now seems pretty clear that late 2012 or early 2013 was the ideal time to
purchase a home: Real-estate prices and interest rates were both near record
lows, creating an unprecedented buying opportunity for those who could muster a
down payment and qualify for a mortgage.
Home affordability is still pretty good
by historical standards, but typical buyers are once again being priced out in
at least two dozen markets ranging from coastal hotspots to lower-cost inland
cities. Three factors are pushing the cost of owning a home beyond the
financial reach of ordinary families: Mortgage rates are ticking upwward as the
Federal Reserve backs away from the super-easy monetary policy of the past five
years. Home prices are rising as the economy recovers. And incomes are barely
budging, which means typical families are once again falling behind as they try
to bank enough to buy a home.
We used data from research firm RealtyTrac to determine where housing
affordability is deteriorating the most. At the top of the list is Salinas,
Calif., where a median-priced home rose 40% from the end of 2012 to the end of
2013, to $388,000. When rising interest rates are factored in, the income
required to purchase a typical home rose by a whopping 58%.
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With home prices rising nationwide by an average of about 11% in 2013, the
income required to buy a typical home rose in all but a handful of cities.
Still, affordability remains strong in the majority of markets, says Daren
Blomquist of RealtyTrac. The problem with the most affordable cities is they tend to be less vibrant
than those where demand for housing is strong and prices are rising. So while
affordability may still be good in many cities, economic opportunity may be
Meanwhile, the other big factor that
determines whether families can buy a home — even if they may have the money
for a down payment — is whether their credit rating is strong enough to qualify
for a mortgage. Banks have been loosening up, and some have recently begun to
lend to subprime borrowers for the first time since the housing bubble began to
burst back in 2006. But for some borrowers, it’s a Catch-22: Lending standards
are easing just as affordability is worsening. Some families that might have
been able to afford a home a year ago can’t now, even if they’re more likely to
qualify for a mortgage.
All of these factors will determine
whether the housing recovery continues or peters out, which some economists are
starting to worry about. While 2013 seemed to be a nice comeback year for
housing after six years of price declines, some analysts think it was illusory.
“The housing price gains in 2013 may have been a mirage,” writes Jeffrey Rosen,
chief economist at research firm Briefing.com. “First-time home buyers have
been effectively priced out of the market.”
Rosen believes a surge of all-cash
buyers — who are usually investors buying properties to flip or rent — pushed
up prices in 2013, a trend that could reverse itself in 2014 as demand from
investors wanes. If so, homes that have drifted beyond the reach of first-time
buyers could become more affordable, not less. “Affordability conditions need
to revert to where they were in January 2013,” Rosen says.
If that happens, potential homeowners
should make sure they don’t miss a historic buying opportunity twice.
Newman’s latest book is Rebounders: How
Winners Pivot From Setback To Success. Follow him on