4Q 2020 Housing Affordability: No Change but Challenges Loom

By Kerry Smith

The NAHB/Wells Fargo index found that lower interest rates offset rising home prices in the latest quarter – but that will change if mortgage rates start to rise.

WASHINGTON – Record-low mortgage rates offset record-high home prices to keep housing affordability steady in the fourth quarter of 2020, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI).

Though affordability rates held firm, regulatory and supply-side challenges threaten to aggravate new-home affordability problems in the year ahead, and a rise in average mortgage rates could change the equation. However, a general move to the suburbs could do the opposite and help make overall housing more affordable.

In all, 58.3% of new and existing homes sold between Oct. 1 and Dec. 31 were affordable to families earning an adjusted U.S. median income of $72,900, which is unchanged from the 58.3% of homes sold in the third quarter of 2020 that were affordable to median-income earners. The third quarter reading the lowest since the fourth quarter of 2018.

“While historically low mortgage rates are helping on the affordability front, there was a significant jump in year-over-year home pricing from 2020 to 2019, as inventory remained lean due to supply chain issues and the COVID-19 pandemic,” says NAHB Chairman Chuck Fowke, a custom home builder from Tampa. “Moreover, lumber prices remain extremely high, and builders anticipate that regulatory costs are likely to rise, which will put even more upward pressure on home prices.”

“Looking forward, interest rates are likely to rise as the pace of vaccines increase and economic activity climbs back to more normal levels,” adds NAHB Chief Economist Robert Dietz. “One trend that will help counterbalance growing affordability concerns is the suburban shift in home sales and construction to smaller markets. An increase in telecommuting is providing more ‘market power’ to prospective buyers, allowing them to live in lower cost, lower density markets.”

The HOI found that the national median home price jumped to an all-time high of $320,000 in the fourth quarter, surpassing the previous record-high of $313,000 set in the third quarter. At the same time, though, average mortgage rates fell by 20 basis points in the fourth quarter to a record-low of 2.85%. In the third quarter, mortgage rates averaged 3.05%.

Overall, three of the top five most affordable housing markets were in Pennsylvania, while all of the least affordable markets were in California.

Lansing-East Lansing, Mich., was the nation’s most affordable major housing market (metros with a population of at least 500,000), with 89.9% of all new and existing homes sold in the fourth quarter affordable for families earning the area’s median income of $75,000.

Rounding out the top five affordable major housing markets in respective order were Harrisburg-Carlisle, Pa.; Pittsburgh, Pa.; Scranton-Wilkes-Barre-Hazleton, Pa.; and St. Louis, Mo.

Los Angeles-Long Beach-Glendale, Calif., supplanted San Francisco-Redwood City-South San Francisco, Calif., as the nation’s least affordable major housing market. In the LA area, just 9.1% of homes sold during the fourth quarter were affordable to families earning the area’s median income of $71,800.

Other major metros at the bottom of the affordability chart were in California. In descending order, they included San Francisco-Redwood City-South San Francisco; Anaheim-Santa Ana-Irvine; San Diego-Carlsbad; and San Jose-Sunnyvale-Santa Clara.

© 2021 Florida Realtors® Reprinted with Permission.

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