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General housing affordability conditions remained
favorable but declined in the second quarter, largely
the result of higher home prices, according to the
National Association of Realtors.
NAR's composite Housing Affordability Index was 120.8
during the second quarter, down 12.4 percentage points
from 133.2 in the first quarter, and was 11.5 points
below the second quarter of last year when it stood at
132.3. A higher median home price and an increase in
the average effective mortgage interest rate negated
an increase in family income.
The index shows a median-income family had 120.8
percent of the income needed to purchase a
median-priced existing home, which was $208,500 in the
second quarter. The typical family, earning $56,917,
could afford a home costing $251,900 in the second
quarter.
This index measures affordability factors for all
homebuyers making a 20 percent down payment, with an
index of 100 defined as the point where a
median-income family has the exact amount of income
needed to purchase a median-priced existing home.
David Lereah, NAR's chief economist, said the median
home price in the second quarter was 13.6 percent
higher than a year earlier. "The strong rate of home
price appreciation caused some erosion in
affordability conditions, yet it hasn't dampened the
market because the second quarter was a record for
existing-home sales," he said. "Since mortgage
interest rates are still so low, housing affordability
conditions remain historically favorable -- there's
still headroom in this market."
NAR President Al Mansell, of Salt Lake City, said the
national index masks widely varying conditions around
the country. "We find excellent housing affordability
conditions in most of the Midwest and South, but there
are challenges in high-cost areas -- concentrated in
parts of the Northeast and West," he said. "Even so,
the fact that we continue to set sales records
demonstrates the strength of homeownership as a
priority and as an investment."
According to the Federal Housing Finance Board, the
average effective mortgage interest rate for existing
homes was 5.83 percent during the second quarter, up
from 5.77 percent in the first quarter; the rate was
5.73 percent in the second quarter of 2004. This is a
weighted average interest rate between fixed and
adjustable loans, including the cost of points, and
represents a true bottom-line mortgage cost.
Affordability for first-time homebuyers also declined
in the second quarter, falling to an index 70.1 from a
reading of 76.8 in the first quarter; it was 7.0
points below the second quarter 2004.
The association's First-Time Homebuyer Affordability
Index shows a typical first-time buyer household, aged
25 to 44, with an income of $32,433, had 70.1 percent
of the income needed to purchase a typical starter
home in the second quarter with a 10 percent down
payment. The median starter home price was $177,200,
during the second quarter; the typical first-time
buyer could afford a home costing $124,200.
"The index number doesn't tell the whole story,"
Mansell said. "For example, our survey data shows the
median down payment by first-time buyers is only 3
percent, and more than 4 out of 10 are purchasing with
no money down. In addition, about a quarter of
first-time buyers who make down payments are receiving
gifts from their parents." When the index was created
in the early 1980s, the median first-time buyer down
payment was 10 percent.
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