Homes More Affordable – For How Long?

There was a silver lining in the recent housing market collapse: prices dropped to more affordable levels for American families who didn’t already own.

Buying still isn’t easy. It’s become more difficult to qualify for a mortgage from banks and other lenders that have tightened up their credit qualifications. But the following chart, which also appears on page 11 of a chartbook released by the Urban Institute’s new Housing Finance Policy Center, shows the dramatic improvement in home affordability in the wake of the market’s recent downturn.

The blue line shows actual house prices over time – that’s the median, or middle, price for every single home sold nationwide in a given year. The red line shows the maximum a typical family can afford, assuming they put down 20 percent and get a 30-year mortgage at the prevailing interest rate, which is currently about 4.1 percent.

During the credit bubble, the blue price line surged above the maximum, putting a new house out of reach for many more families. Post-crash, that relationship reversed, making homes more affordable again.

But affordability still varies greatly, depending on where you live. The Urban Institute calculated how prices in individual U.S. cities compared with prices in the early 2000s, before the housing boom. Buying a house is even harder today than it was then for families in Seattle, Dallas and Washington, D.C., but houses are more affordable in Oakland, Chicago, and Orlando.

In the past year, as this chart also shows, median sales prices have shot up as rising interest rates have increased the cost of borrowing.

This raises the question: how long will this period of affordability for some last?