Home Ownership Affordability Monitor Update: August 2020
Home ownership affordability improved slightly in June as mortgage rates continued to decline in the United States, according to the Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor (HOAM) index. However, rising home prices and fallout from the COVID-19 pandemic continue to suppress affordability for most households nationally, despite historically low interest rates.
A HOAM index below 100 indicates that the median-priced home is unaffordable to the median-income household given the current interest rate. In June, the HOAM index rose to 93.13 from a revised 92.68 for May but was below its 95.11 reading a year earlier. Home ownership costs in June (as measured by principal and interest, taxes, and insurance) accounted for 32.2 percent of the annual median income of U.S. households, above the 30 percent affordability threshold set by the U.S. Department of Housing and Urban Development. June marked the third month in a row that the national HOAM index was below 100.
The 30-year fixed mortgage interest rate ended the month of June at 3.16 percent, a drop of seven basis points (bp) from May and a 64 bp decline from June 2019. The estimated median household income in the United States was revised downward in June and came to $59,377 as a result of the recession created by the COVID-19 pandemic. Although the median income was up 3.5 percent from May, it was down 4.4 percent from a year earlier. Meanwhile, the national median existing home price (three-month moving average) continued to rise, climbing by 3.6 percent to $289,500 in June from a revised $277,167 for May and jumping 8.5 percent from a year ago. Prolonged inventory shortages in many markets are exerting steady upward pressure on home prices, which reached peak levels nationally in June. Although lower interest rates have helped improve home ownership affordability over the past three months, higher prices and a projected decline in household incomes continue to keep housing unaffordable for median-income households in the nation.
Just over 19 percent of metro areas had a HOAM index below 100 in June, indicating that they were unaffordable to median-income households. By contrast, a clear majority of metro areas—80.6 percent—had an index above 100 and were considered affordable. Even so, affordability fell in 54.7 percent of metro areas from May to June as rising home prices and lower household incomes took their toll. In general, high-cost metro areas on the West Coast as well as in the Northeast and South Florida were among the least affordable, while metros in the middle of the country, particularly in the Midwest, tended to be the most affordable.
Among the nation’s largest metro areas (those with populations greater than 500,000), San Jose-Sunnyvale-Santa Clara, California, was the most expensive in June with a median existing home price of $1.19 million, up 8.3 percent over the past year. Meanwhile, San Francisco-Oakland-Hayward, California, was the nation’s least affordable large metro in June with a HOAM index of 54.3. Even though homes in San Jose were more expensive, household incomes there were generally higher than in San Francisco ($130,818 for San Jose compared with $113,556 in San Francisco), making San Jose slightly more affordable.
With a median existing home price of $1.17 million, the annual share of income needed to own a home in San Francisco was 59 percent, the highest home ownership cost among large metros and well above the 30 percent that is considered affordable. Still, rising home prices continue to be somewhat offset by falling interest rates and stable household incomes, which led to a modest improvement in overall home ownership affordability in San Francisco compared with the previous month.
The least expensive large metro area in June was Toledo, Ohio, where the median sales price was $121,417 and the estimated median household income was $51,671. Home prices there dropped 19.2 percent over the past year. Toledo was also the most affordable large metro in the nation with a HOAM index of 165.7. On average, Toledo households spent 19.5 percent of their annual earnings on housing—the lowest home ownership cost among large metros in June and amply below the 30 percent affordability threshold. Decreasing home prices and lower interest rates were primarily responsible for high home ownership affordability in Toledo.
With a median existing home price of $824,667 and a HOAM index of 55.7, Santa Cruz-Watsonville, California, was both the most expensive and least affordable small metro area in the United States (metros with populations below 500,000) in June. Meanwhile, the least expensive small metro during the month was Bay City, Michigan, where the median existing home price came to $83,498. Kokomo, Indiana, remained the most affordable small metro with a HOAM index of 229.4. It had a median home value of $117,823 and median household income of $57,539. The median existing home price in the region declined 12.2 percent over the past year.
Albuquerque, New Mexico; Toledo, Ohio; and Deltona, Florida, had the greatest improvement in affordability among large metro areas. In Albuquerque, affordability rose 33.1 percent over the past year, while affordability in Toledo and Deltona rose by 24.3 percent and 23.8 percent, respectively. The improvement in affordability in these markets was primarily driven by declining home prices and low interest rates. Meanwhile, Spokane-Spokane Valley, Washington; Durham-Chapel Hill, North Carolina; and South Carolina’s Charleston-North Charleston area saw the sharpest falloff in home ownership affordability—with declines of 8 percent, 7.4 percent, and 7.1 percent, respectively—in June from a year earlier. All three regions saw double-digit percentage increases in home prices over the past year, the primary driver of the decrease in affordability.
The housing market continues to experience a surge of sales activity because of relatively low interest rates and pent-up demand for housing as states continue to reopen after COVID-19 shutdowns. According to the National Association of Realtors (NAR), pending home sales bounced back sharply, rising 16.6 percent from May to June, while closed transactions were up 20.7 percent. Despite this improvement, perhaps the biggest impediment to continued momentum in home sales is the lack of available houses to buy. The NAR reported that existing home inventory fell 18.2 percent in June, resulting in a relatively low four-month supply of inventory. At the same time, new home construction has not kept pace with demand. As a result, home prices in many markets continue to rise, making affordability increasingly difficult for the median-income household. In addition, although job growth has started to recover, unemployment remains high and estimated household incomes have been suppressed since the beginning of the pandemic.
Finally, the number of mortgage loans in forbearance has dropped from peak levels and now accounts for 7.4 percent of all mortgages, according to data provided by Black Knight. Still, forbearances and delinquencies remain elevated in regions like South Florida that have significant exposure to industries that were hard-hit by the pandemic, such as leisure and hospitality. Furthermore, the uncertain outlook for additional government stimulus for unemployed workers—as well as businesses still struggling to recover—may pose additional challenges for homeowners having difficulty making mortgage payments. These factors, combined with elevated levels of mortgage delinquencies nationally, could raise the possibility of higher mortgage defaults in the future.
For more details, including metro level analysis, please visit the interactive Home Ownership Affordability Monitor tool.