Homebuying Affordability Strong in Many Metros but First-Time Buyers Face Financial Hurdles

by Rocio Sanchez-Moyano
Research Analyst

Stagnant incomes and tight credit since the recession have worked in tandem to keep many renters from becoming homeowners in recent years, even as prices plummeted. Now, as the housing market continues to recover, questions about homebuying affordability are beginning to creep back into the public discussion. But nationally, the affordability outlook remains favorable. The ratio of the mortgage payment on a median priced home to median incomes remains near all-time lows, buoying the National Association of Realtors® affordability index. Median home prices have yet to fully rebound from their mid-2000s peaks in two-thirds of the metros for which we have data, and interest rates have kept borrower costs historically low (Figure 1).

Note: Prices adjusted to constant 2014 dollars using CPI-U for All Items.

Source: JCHS tabulations of NAR Affordability Index and Single-Family Median House Price, annualized by Moody’s Analytics; US Census Bureau, Current Population Surveys; Freddie Mac Primary Mortgage Market Survey.

But house prices have been rising faster than incomes. Home prices increased in 83 percent of metros for which NAR data was available from 2013-14. Approximately 50 percent of metros experienced annual appreciation of between 0 and 5 percent, and another 33 percent of metros had appreciation above 5 percent. Incomes, on the other hand, generally grew more slowly, with only 6 percent of metros experiencing nominal income growth of more than 5 percent. In fact, in 73 percent of metros analyzed, median incomes grew more slowly than the monthly mortgage payment on the median home.

The growing disparity between incomes and home prices can make it difficult for renters to transition into homeownership. So, how many renters in metro areas across the country can afford the monthly costs of owning a home? To estimate this, the Joint Center calculated the monthly mortgage payment on a 30-year, fixed-rate loan with a 5 percent downpayment for a median-priced home in each metro area, adding monthly costs for property taxes and insurance. We then determined affordability by comparing monthly costs to the incomes reported by renters in the 2013 American Community Survey, applying the Consumer Financial Protection Bureau’s qualified mortgage rule standard that all debt payments cannot exceed 43 percent of household income. We assumed that 8 percent of a household’s income services non-housing debt, like credit cards, car loans, and student loans, based on the median non-housing debt load among households in the Survey of Consumer Finance, which leaves 35 percent of household income available for monthly housing payments. To the extent that renters transitioning to homeownership buy “starter homes” priced below the median, our estimate of the number of renters able to afford monthly owner costs will be conservative.

Using this standard in the 168 metros for which data was available, 36 percent of all renters can afford the monthly costs of owning a median-priced home in their area. (See interactive map below.) Expensive and renter-heavy cities like New York, San Francisco, Miami, and Boston make up the list of nineteen metros which are affordable to 30 percent or less of the renters living in them. But despite accounting for only 11 percent of the metros for which data was available, these expensive metros house nearly a third of all the renters included in our analysis. On the other hand, in 46 metros, monthly costs for the median-priced home are affordable to at least half of renters. Many of these areas are smaller Midwestern metros like Topeka, Kansas, and Appleton, Wisconsin.

Homebuying Affordability Can Vary Greatly Metro to Metro 
(Click map to launch)

Renters aged 25-34, who are in the prime age to transition to homeownership for the first time, generally have higher incomes than the typical renter, and are actually better positioned to afford the monthly costs of owning as a result. Across all of our metros, 42 percent of renters in this age group could afford to own the median-priced home. And more than half of the metros we analyzed were affordable to the majority of 25-34 year old renters living in them. Southern and Midwestern metros account for many of the most affordable metro areas. In all, 31 percent of renters aged 25-34 lived in these highly affordable metros, while only 23 percent lived in metros where no more than 30 percent of renters of this age could afford the costs of ownership.

Favorable affordability conditions are currently present in some of the metros hardest hit by the housing crisis. On average, more than 45 percent of renters in the 30 metros with the largest declines in homeownership rates from 2006-13 can afford to own a home. Las Vegas, which saw the largest decline in homeownership, is affordable to more than half of its renters. Phoenix and many hard-hit metros in Florida are affordable to at least 40 percent of their renters. And Atlanta, which experienced a severe foreclosure crisis, is affordable to 53 percent of its renters (Figure 2).

Source: JCHS tabulations of US Census Bureau, 2013 American Community Survey; Freddie Mac, Primary Mortgage Market Survey; NAR, Median Existing Single-Family Home Sales Price.

But despite favorable cost-to-income ratios in many metro areas, aspiring homeowners may face other hurdles on their path to homeownership. Tight underwriting standards can make it difficult to obtain a mortgage, and even for renters with high credit scores, saving enough for a downpayment is often challenging. A downpayment of just 5 percent of the value of the median-priced home can range from $3,800 in Youngstown, OH to $42,800 in San Jose, CA. Meanwhile, the median net wealth of renters in 2013 was $5,000, an amount sufficient for a 5 percent downpayment in only 5 of the 168 metros for which data is available. Financial concerns like student loan debt and unaffordable rents can compound the difficulties of saving for a downpayment. Twenty percent of US households had student loan debt in 2013, and among renters aged 25-34, the rate is more than double the US total, at 41 percent. And about half of all renters are cost burdened, with housing costs that exceed 30 percent of their incomes; the share is nearly as high among renters of prime first-time buyer age. In all, rising interest rates and other financial constraints may be headwinds to a robust entry of renters into homeownership, but price appreciation is expected to slow in many parts of the country this year, potentially allowing incomes to catch up and keep many metros affordable.