Mortgage lenders recommend spending between 28 and 36 percent of your gross monthly income on debt payments. While this is considered to be perfectly affordable, it’s stunning that one-third of the homes for sale right now are unaffordable by historical standards.
More than half the homes on the market in seven major American metros are unaffordable, according to a new Zillow study of home price data. These markets include Miami, Los Angeles, San Diego, San Francisco, Denver, San Jose and Portland. If you think about what people are earning and what the housing prices are, there is clearly a relationship between the two. So why are these homes so unaffordable?
Home prices are rising quickly in some neighborhoods
A lot of it reflects on what is going on in a specific neighborhood. If you look at neighborhoods with a large amount of foreclosures, you aren’t seeing home prices rise because new homes on the market have to compete with the foreclosures around them.
But in neighborhoods where the lowest priced homes all go off the market and go to the next level of lowest priced homes, you’re seeing prices rise pretty quickly. It’s a continuous cycle, which causes those homes to become unaffordable. When the bottom level prices are sucked out and purchased, home prices rise.
Mortgage interest rates are rising
When mortgage interest rates are low, people can afford more. When mortgage interest rates for a 30-year fixed-rate were at 3.5 percent, people could afford more expensive homes. For example, if you earn $50,000, a conventional lender will probably let you borrow and spend up to $200,000 on a home with a 3.5 percent interest rate. However, if your mortgage interest rate is at 4.5 percent, the lender might let you spend less. So affordability has been cut because mortgage interest rates have gone up.
As home prices and mortgage interest rates rise, affordability will lessen. This is making some people nervous because these are the kinds of trends we saw during the years leading up to the housing crash. I’m not saying a bubble has been forming, I just think it’s interesting to see who can afford to buy a house at this time.
WSB Radio’s Ilyce Glink Show – April 6, 2014
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