Remember all those articles (including some for this blog) that claimed mortgage rates would have to rise to X percent in order that homes to become unaffordable?
Well, mortgage rates have been pretty flat within the last several years, and remain amazingly attractive historically, yet ideals have now risen out of reach for several prospective buyers.
What gives? How could this be? Well, they\’re unaffordable because ideals have surged.
The Housing Recovery Has Left Many Behind
While the housing recovery have been wonderful for those who were able to grip through the crisis, and those sufficiently lucky to pick up properties on the cheap post-crisis, it\’s left behind scores of would-be buyers in its wake.
Per a recent analysis from Zillow, mortgage payments are now unaffordable in half on the nation\’s 35 largest housing markets, despite those rock-bottom interest levels. Certainly this can\’t be nice thing.
They found that monthly payments for the median-valued U.S. property only need 16% of median income, which is quite affordable.
But here\’s the problem C the median-priced home isn\’t the one for sale. The homes which might be for sale tend to be priced above the median for their particular market.
This is not only just a feeling you get while perusing inventory online. In all but three of the largest 35 U.S. metros, the median price of homes for sale is higher than the median valuation on all homes.
In short, it\’s mostly expensive homes which have been listed these days, not the run-of-the-mill average-priced ones.
You\’ve probably heard that starter homes are difficult to come by. This is partially given that the expected move-up buyers aren\’t going up, thanks to a lack of home equity as well as a low mortgage rate they don\’t need to give up.
So when you actually evaluate homes listed for sale nationwide, 20% of median salary is being swallowed up.
Unfortunately, that\’s the pretty picture of the nation overall. For many individual housing markets, it\’s way worse.
Los Angeles Homeowners Facing Biggest Challenge
In Los Angeles, the conventional property for sale requires 46.8% of median income, which a lender probably wouldn\’t even accept DTI-wise.
Prior to your most recent housing bubble, buyers in LA only were required to spend 35.2% of income on home loan repayments for the typical home purchase.
To sum it up, LA buyers have access to many of the lowest mortgage rates in history, yet need nearly half their paycheck to cover the mortgage. Causes you to question that rent vs. buy decision, eh?
It\’s the same story in California\’s five other largest metros, including S . fransisco (40.2% of income), San Diego (39.6% of income), San Jose (39.3%), Sacramento (29.1% of income), and Riverside (27.9% of revenue).
To determine affordability, Zillow assumed the consumer had a 20% down payment and a 30-year fixed at Freddie Mac\’s prevailing mortgage rate.
These numbers are all higher when compared with the income spent on the mortgage from 1985 through 2000.
The issue is similar in many other metros nationwide aside from places like Cleveland, where homes actually are more affordable than they\’ve been historically.
There, the median retail price of ~$144,000 requires just 12.7% of median income for monthly mortgage payments, significantly less than the 20% needed throughout the pre-bubble years.
But Cleveland is one of the few places where it\’s got gotten much cheaper, and remember, this is certainly at a time when mortgage rates remain near uncharted territory.
Prospective buyers still need to contend with larger down payment requirements because of those higher list prices, when taken together, produce the prospect of owning a home dim.
Underwriting Are certain to get More Forgiving
The only silver lining is always that many lenders are now offering 1% first payment, including Quicken, and some are even rolling out zero down options like Movement Mortgage.
At once, Fannie Mae will soon allow higher debt-to-income ratios when its Desktop Underwriter (DU) Version 10.1 is released at the end of July.
In just over a month, DU will consider loan applications with a maximum DTI of 50%, with zero longer require compensating factors for DTIs between 45-50%.
Additionally, their prior DU release from last September opened the entranceway to automated underwriting for borrowers without people\’s credit reports.
Clearly we are trending toward looser underwriting guidelines after many years of what many felt were excessively harsh policies.
But it\’s sort of worrisome given it comes at a time when home prices are eclipsing old all-time highs and mortgage rates remain dirt cheap.
If buyers are nevertheless struggling to qualify with 3% rates on mortgages and 1% down payments, there might be a challenge lurking.