The number crunchers at the National Association of Home Builders have done some research that shows just how much small changes in price and interest rates affect housing affordability and how much that can vary between markets.
For instance, in a blog posted Tuesday, NAHB economists say more than 1.3 million American households have been priced out of the market by interest rate hikes alone in the past two months. That’s based on a rate increase from 2.75% to 3%, a quarter of a percentage point, and on a median price of $346,757.
That effect diminishes as rates go higher. "For example, when mortgage interest rates increase from 5.25% to 5.5%, 1.1 million households are priced out of the market for a median-priced home," the NAHB says in that report. "This diminishing effect happens because only a declining number of households at the higher end of household income distribution will be affected.”
In other words, a lot of people have already been priced out of the market based on median prices and the income needed to qualify for that loan, based on the standard of 28% of monthly gross household income being the "priced out" ceiling.
Local effects range widely based on house prices and income
Interest rates are only part of the story when it comes to affording a mortgage, of course. A few weeks ago, the big homebuilding trade group reported that each $1,000 increase in the price of a house prices nearly 159,000 households out of the market for that home. Again, that’s the national figure and the effect varies.
Here’s a link to that study -- titled "NAHB Priced-Out Estimates for 2020" -- that came out in January from NAHB economist Na Zhao. That report includes tables that show the local and state variations that comprise the national whole.
For instance, Table 3 in that report shows that of 381 metropolitan areas, the largest priced-out effect, in terms of absolute numbers, is New York-Newark-Jersey City, where 6,172 households will be disqualified for a new median-priced home if the price goes up by $1,000. That’s based on a metro area of 7,441,719 households, a median new home price of $474,978, and an annual gross income of $128,804 to qualify.
Compare that to, say, Tallahassee, Florida, where the median price at year’s end was $340,903, close to the national median, and requiring an income of $85,613. Each $1,000 price increase in that market of 143,624 households knocks 205 people off the potential buyer’s list. Then there’s Joplin, Missouri, where the median price of $185,145 requires $46,620 in household income to finance for 30 years and 191 households in a market of 75,340 households would be disqualified for each $1,000 rise in house price.
The Millionacres bottom line
To sustain a thriving market for investors and everyone else, people need to be able to afford new and existing homes. While the NAHB focuses on new construction, the effect is the same: Less affordability means fewer buyers for available properties.
At the same time, the market has also been affected by low supply, which drives up demand and prices, so there’s a counterbalance there. Further, declining affordability can make lower-priced homes more attractive and could boost their prices as more people gravitate to them. And that could affect affordability, too.
As always, the only constant is change.