Dennis' Mortgage Blog

Question of the week:  I hear “affordability is up,” is that a good thing?

Answer:  If you are a buyer yes, if you are a seller maybe not.

The California Association of Realtors (CAR), and other realty groups across the nation, reports on “housing affordability” in the state.  Affordability is determined by the percentage of households that can afford to purchase the median priced home in the state or in a region.  Affordability is determined by what income is needed at current mortgage rates to purchase the median priced home with a 20% down payment.  While everyone does not have a 20% down payment it is the criteria used so the index of affordability can be compared from period to period.

When the index increases that means more families can afford to purchase the median priced single family home, when it decrease that means fewer families can afford homes.  For the first quarter of 2011, CAR announced, the percentage of buyers able to afford the target home rose to 53%.  This is an increase from 50% who could afford the benchmark home in the last quarter of 2010 and also in the first quarter of 2010 (one year ago).

The data used to calculate the affordability index were a median price of $278,430, and interest rate of 4.90% that resulted in a monthly housing payment, including taxes and insurance, of $1500 per month requiring a minimum income of $60,090 to qualify to purchase the home. (Note that CAR uses as its baseline qualifying income to housing payment ratio of 30% of gross income.)  Fifty-three percent of households in the state make $60,090 or more per year and therefore are able to purchase the median priced home.

As expected the affordability index across the state varies.  For instance, in San Francisco only 25% of buyers can afford to purchase the median home in the region, whereas in Tulare County the number if 72% due to the large differences in home prices.  Orange County at 33% is less affordable than Los Angeles County at 46%.

With rates in the first quarter of 2010 being much higher than in the last quarter of 2010 (when we hit our all-time lows in October and then again in November) the increase in affordability is mainly due to the decline in prices. 

If prices are stable and affordability increases that indicates that lower mortgage rates are the primary reason for the decline.  If rates are stable and the affordability index increases that indicates that prices are declining.

The current increase in affordability statewide is good news for buyers and not so good news for those selling as the increase was not due to lower mortgage rates but rather a decline in median home values.

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This week’s blog postings:

Financial Revolution  I looked at the financial crises in Europe, again, and what impact they have on mortgage rates in the U.S.  Europe is on the brink of being torn apart economical, politically and socially and not many Americans are aware of what is happening since no guns or bombs are involved.

Mortgage Fraud  The Treasury reported that reports of suspicious activity increased in the mortgage industry in 2010.  Duh.  I look at the report and what it means, or does not mean.

Price, Price, Price   Prices had huge impact on trading on Wednesday, and Thursday and today.  A look at what different commodity prices have on markets and mortgage rates.

A follow up from Wednesday’s post today rather than yesterday as we now have both the PPI and CPI numbers for April.  As predicted in my “Price, Price, Price” post the gross price numbers were up sharply and the core prices up slightly. The increase for wholesale prices, measured by the Producer Price Index (PPI) was up 0.8% in April and the twelve month increase is the highest in three years with prices up 6.8% over the past twelve months.  The major cause of the increase is energy prices which rose 2.5% in April and have increased more than 2% each of the last five months.

Energy prices are up 21.1% over the past year.  Despite the increases wholesalers have been very slow to pass along the higher costs to consumers.  The Consumer Price Index saw similar increases in prices as the PPI numbers, 0.8% for total price increases and 0.4% in the “core” price (core prices are stripped of energy and food prices).  The twelve month overall increase is 3.2%, the highest since October 2008, and above the Federal Reserve’s target rate of 2-2.5%.  However since the Fed uses the core price index numbers and not the total numbers there will be no movement by the Fed to increase rates---which benefited the mortgage markets.

Prices looking forward.  This past week has seen sharp declines in many commodities prices (see my posts on Price, Price, Price).  If the prices continue to decline then the gap between the total price index numbers and the core index numbers will decline due to lower energy and food costs.  Manufacturers may have smartly ridden out holding onto to higher production costs without passing them onto consumers and we may see some increased consumer spending.

Also helping rates was new unemployment claims remaining over 400,000.  While the total claims number was lower than the week before, having four weeks in a row over 400,000 again is a sign that employers may have held prices firm for consumers but made up the higher costs they paid for fuel by cutting workers.  Employment is still not gaining traction.

Rates for Friday May 13, 2011: Despite higher prices due to energy costs, despite Treasury auctions that put several billion dollars of U.S. debt on the market, fundamentals held mortgage rates firm from last Friday in a week that saw a rise mid-week in mortgage costs and then a rebound to meet last Friday’s numbers.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               4.50%               Flat

30 year high-balance conforming           4.625%             Flat

30 year FHA                                         4.20%               Flat

30 year FHA jumbo                              4.25%               Down 0.05%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

*With new Fed regulations in place cost increase has been added to weekly rate quote.  Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Affordability is up, spring is in bloom and the weekend weather in Southern California is supposed to be perfect for buying a home.  Call me to discuss mortgage options and your affordability!

Have a great week,

Dennis