Affordability - Big Improvement in Most Markets

April 3, 2009

By Selma Lewis, Research Economist

Affordability has been a major concern as home prices in some markets more than doubled earlier in the decade. After a period in the 1990s of great affordability when mortgage costs were between 20 and 35 percent of household income for most U.S. markets, the period after the year 2000 was marked by falling affordability, and in some markets, extreme un-affordability. Still, not all markets observed the same levels of increased housing prices and decreased affordability.

When measuring affordability, it is important to not only look at housing prices, but also to consider variables such as mortgage rates and area household incomes. Based on this data, we have calculated median mortgage payments as a percent of an area's median household income to measure affordability in several markets across the country.

Observing affordability over a period of the past 18 years (1990 through 2008) highlights two distinct patterns among different metropolitan areas. The first group of markets clearly exhibits a sharp rise in housing prices significantly exceeding income growth, accordingly leading to falling affordability. For example, prices in San Diego, CA, rose significantly between 2002 and 2006 with mortgage costs for the median priced home going from around 40 percent of income to almost 70 percent of income. Nevertheless, with prices falling, interest rates low, and generally improving affordability conditions, the affordability of the San Diego housing market is now back to the levels of 2000 (see Figure 1). Although not to the same extreme, other markets experienced similar declining affordability during the boom with a return to affordability levels earlier in the decade. Miami, FL and Boston, MA exemplify such cases (Figure 1). More specifically, coastal markets, East and West, experienced much greater affordability challenges than did the markets in the central part of the country.

_{Figure 1}

Another group of markets, though experiencing some levels of decreasing affordability, remained relatively stable over the same period. Such markets, for example, saw mortgage costs rise from about 20 percent of income to about 40 percent for the median priced home. These rates, even during the housing boom were well below the elevated rates observed in the first group of markets. As shown in Figure 2, affordability in Philadelphia, Portland, and Washington DC, for example, remained relatively steady, with again a significant drop after 2006. In several cases affordability conditions are similar to levels seen before the 2000. By the end of 2008, affordability in Washington DC was above the level of 1990, for example.

In addition, while sweeping price increases started early in this decade for the first group of markets, the second group, with smaller increases, also observed changes several years later, starting around 2003.

_{Figure 2}

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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