As Mortgage Rates Rise, Affordability is Diverging


Freddie Mac’s December U.S. Economic Housing Market Outlook looks at what the company’s chief economist
Frank Nothaft and deputy chief  Leonard Kiefer
call “diverging homebuyer affordability“, that is affordability that depends to
a large extent on the part of the country in which one lives.

In June of this year the Outlook
reported on how rising interest rates would affect homebuyer affordability
and found that most markets were affordable and that rates would have to rise to about 7
percent before they became unaffordable to a typical family.  Six months later interest rates are up by
about a half point and prices have been rising nationwide so Outlook took a
second look to see how housing affordability looks now and what it might look
like in the future.

The economists say that mortgage rates are key to affordability and by
the end of September that affordability had eroded in many parts of the country
from where it was in March.  Several of
the largest markets on the coasts, representing about 28 percent of the
in Freddie Mac’s data, had become unaffordable.  Affordability is measured by the percentage
of households who could afford to buy a median priced home while earning the
median income for the area.  If rates
increase to 5 percent, then two-fifths of the metro areas would become
unaffordable while in much of the Midwest and South affordability would remain


Freddie Mac has created the interactive map above to show how
affordability could be affected at different rates.   At a 4.4 percent rate
for a 30-year fixed rate mortgage, the prevailing rate in the third quarter,
all of the North Central Region remained affordable while just 36 percent of
the West did.  When the maps parameters
are changed to reflect a 5 percent rate (with no change in prices or income) approximately
63 percent of the country
would be affordable; at 6 percent mortgage rates 55 percent
would be affordable; and at 7
percent only 35 percent of the country (but 64 percent of the North Central
region!) would be affordable.

growth may be partially able to offset any rise in mortgage payments and there
has been recent good news.  Job growth in
October and November beat the consensus forecast with job growth increasing at a
monthly pace of 193,000 over the past 3 months. 
These are better paying jobs as well and the unemployment rate is down
to 7 percent and there has been an encouraging increase in job openings.  

housing payments fall relative to income is not only good for potential home buyers
but for sustaining homeownership for existing owners.  Housing payment-to- income   ratios   have moved
sharply  lower  over  the
 past few years, and currently are at the
lowest level since 1980, when  the  Federal  Reserve began  to  keep
 track  of  the ratio.
Relatively low, manageable ratios are critical, Nothaft and Kiefer say, for homeowners
to have a successful, sustained homeownership experience.



Federal Reserve’s Flow of Funds data for the third quarter of 2013 shows that household
wealth is also increasing because of gains in both the stock market and house prices,
rising $1.9 trillion in the third quarter of 2013 from the second quarter of 2012.
Residential real estate holdings increased by $428 billion in the third quarter,
while equities and mutual funds added $917 billion. Home mortgage debt expanded
for the first time since early 2008, up by 1 percent in the third quarter, and
is a positive sign that new mortgage loans are exceeding charge-offs on defaulted

Mac’s economists say that all eyes will be on the ‘Taper’ in the coming months of
2014 and without a doubt it will be the quintessential factor in mortgage rate swings.  “But mortgage rates are just one factor in the
affordability equation, and other fundamentals, such as income growth, will be those
that help create a stable and sustainable environment for attaining homeownership.”

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