Analysis for the Housing MarketThe new home affordability ratio in June increased back to its highest levels since March due to a sharp drop in new home prices. The affordability ratio now stands at 56.9% compared to 56.3% in May and 47.1% in the same year-ago period. Rising mortgage rates were offset by a steep drop in median new home prices which caused affordability to increase from last month; both rates and prices remain considerably lower than they were this time last year.
Affordability with an one-year ARM increased to 58.7% compared to 56.7% in May. Affordability based on an one-year ARM is also higher than it was this time last year when it was 51.4%.
The June figure illustrates that 56.9% of all households across the country could afford to purchase a new home at the median price of $206,200 when using a 20% down payment and a 30-year fixed rate mortgage with June's average fixed rate of 5.42%. Household income of $49,713 would be needed to qualify for the purchase of the median priced new home using a fixed rate mortgage, while an income of $47,718 would be needed to qualify using a 1-year adjustable rate mortgage at an average rate of 4.93%.Definitions and Importance for the Housing Market
The affordability ratio is the percentage of households that can afford the median priced new home. The calculation uses industry standards of a 20% down payment, a 1.83% property tax rate (average of the top 75 metro areas) and a 30-year fixed mortgage at the Freddie Mac mortgage rate published just prior to period end. We assume that total monthly payments, including mortgage, property taxes and mortgage insurance, cannot exceed 30% of gross household income. Income information was obtained from Claritas Inc.
Because information on the percentage of borrowers who can put 20% down is not available, an exact affordability ratio cannot be calculated. A 10% down payment assumption reduces affordability by at least 5%.