Housing Affordability

Housing affordability will be at its highest in a generation this year.

The affordability index is comprised of median home prices, median family income, and the prevailing mortgage rate. An index of 100 implies that a median income family has just enough income to buy a median priced home. An index of 120 implies that a median income family has 20 percent more income than is necessary to buy a median priced home. The index reached an all-time high (since the data creation in 1970) of 174 in 2010. This year, it looks to surpass 180. The rising affordability is a combination of lower home prices, record low mortgage rates, and a slight rise in family income.


In short, there hasn’t been a better home buying opportunity in 40 years.

However, not all people have the necessary confidence to make a major expenditure like a home purchase in an uncertain economic environment. More importantly, the underwriting standards are overly stringent. Those who are currently able to get conforming mortgages have an average credit score of 760. Under normal underwriting standards (and not the lax underwriting of the bubble years), credit scores would be closer to 720 on conforming mortgages. For FHA mortgages, today’s borrowers have an average credit score of 700, compared to historic FHA borrowers who had an average credit score of 660. If the underwriting standards were just to return to normal then there could be an additional 15 to 20 percent increase in home buying activity.

Banks have plentiful cash reserves but are unwilling to lend. They are blaming the regulators, saying extra cash holding is needed in case of another catastrophic economic event and because the banks are uncertain about future regulatory rules. Under these circumstances any additional attempts by the Federal Reserve to lower interest rates via another third round of Quantitative Easing (QE3) and printing more money would be inconsequential to the housing market. All the while, printing money could pose higher inflation risks in the not-too-distant future. Simply getting the excess cash holdings held by the banks out to the borrowers will be the true, natural stimulus for the economy.

Lawrence Yun, PhD., Chief Economist and Senior Vice President


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  1. Brian Teal

    Banks are aggressively looking to lend, but they are being tight in the sectors they are lending in. Owner occupied CRE is still a segment they are lending in, but I found the businesses are having cash flow and DSC issues. From what I discuss across the country, this is the norm now for mid-large business (small business is just getting hit HARD from all ends). However, we have lowered rates to below market, waived fees, and reduced the conditions and prerequisites in order to obtain quality loans. The larger banks seem to be battling for good loans and are being extremely competitive. SBA has been a factor in having loans qualified, so I see a big disconnect between stimulus funds reaching small business. However, Banks like BofA, Rabo, etc are starting Small Business segments to go after small business specifically; they must know something.

    However, again, after looking at several loan apps and speaking with these businesses (in CA at least), I see a big issue in being over-leveraged, very little cash-flow, and basically being stuck in high interest loans they aren’t strong enough to refi.

  2. Joanne

    Two key points: how confident are prospective home buyers to make that purchase and how many potential buyers are being turned away bc of the stringent lending requirements? I do believe home buyers should prove themselves worthy to make such a purchase. They should be required to have a healthy down payment and have a good credit history. As for the confidence, that will only come with a stronger economy in which all Americans are not concerned about losing their jobs or losing the savings due to a medical emergency.

  3. I think that to a great extent, the loose lending practices of the past decade lead to home buyers to feel secure about over purchasing based upon the resources that they had and the current economic conditions has made even qualified buyers resist what is seen as potential disaster if we do indeed move closer to a second recession.

    The messaging that is being broadcast daily that suggest that this is a bad time to invest in owner occupied residential, adds to the uncertainty.

    I think that a more positive message would be that the qualification metrics are very different than in prior years and that home buyers will find it very difficult to over purchase and therefore will have to make an adjustment in expectations about how much home the will qualify to purchase.

    The flip side of this is that housing is generally more affordable than in past years because of the obvious overpriced nature of homes created by the housing bubble. If you bought prior to and including 2007, buyers today can buy the same home in your neighborhood for significantly less than you did. Since the appraisal is based substantially on current sales, the current value of your home is going to be less!

    What I find amazing is that the lending institutions are still not addressing the current home owners that are under water with very little short term (1-5 years) hope for relief because of the lack of cooperation in bringing the price of their homes more inline with current market conditions.

    Homeowners need to be worked with to modify the current mortgages, for those that are still hanging on, to reflect the current value of their homes. We are seeing across the board reassessments and reappraisals that value their homes very differently from the appraisals of even three years ago.

    Even in areas where homes are still selling, they are selling at substantially lower prices than they were for primary home investors just a few years ago. The net effect is that the new home buyers in your neighborhood buy for less than you did, as inventories are liquidated to improve lender holdings of foreclosures and the average value of the homes are going to remain lower for years to come.

    I still maintain the the people least knowledgeable about the mortgage transaction are the very people being stuck with the total responsibility and the bill of what appears more every day to have been corrupt mortgage practices.

    The lenders are trying to escape, after being bailed out by the American public, their part in this crisis.

    Simply put, modify the mortgages of the millions of Americans that were duped by industry experts to take variable rate mortgages, interest only mortgages based on overpriced homes that they would not be able to qualify to purchase otherwise and accept the reality of the losses associated with these practices.

    Yes there are still millions that simply can’t afford the homes that they bought based on ever increasing sales prices and easy to get mortgage financing that gave the illusion of a great investment. Facilitate short sales/modifications and help them get from under the bus without destroying their credit completely while creating a shorter recovery for them. A bad economy, job loss, equity loss , foreclosure or trying to hold on to homes based on mortgages that do not reflect today’s reality makes recovery a long term prospect at best. The fact is that many of these folks would be able to better afford the homes that they own or lesser homes based upon today’s prices and qualification requirements and could still remain homeowners.

    It is not surprising that many homeowners are deciding to walk away from there underwater properties and opt to rent. I do not condone the practice but it is becoming more and more practical to consider this approach. The very interesting part of this is that it has not been predominantly low to moderate income primary resident households that have been adopting this approach, it has been homeowners that have vacation homes and investment properties that have led the way. These are folks that will still have the home that they is their primary residence.

    The current environment is almost tailored for investors rather than for those homeowners looking for a primary resident. Low interest rates and bulging inventories make it possible for the under $100,000 home buyer to get a great deal but we sold millions of homes that were above this threshold that are now included in this segment now.

    Everyone loses in the current environment and that include lenders. Yes it will affect their bottom line to be fair to the homeowner but welcome to the club, the national bottom line has also been affected by the bogus activities that our financial institutions marketed to the American public and then bet against it’s success.

    You can’t admit to the driving the car but take no responsibility for the resulting crash and the need for a bailout was indeed, in my opinion, a confession to driving the car.