MReport October 2018

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44 | TH E M R EP O RT FEATURE By Ralph DeFranco I t may not feel like it, but af- fordability is still at decent lev- els in over half of the nation. Nationally, in fact, it's still a little better than pre-crisis averages. However, there is quite a broad range, with many areas now very expensive, both in relative and absolute terms, and others that are much more affordable. This wide variation makes it difficult to answer the question, "Is now a good time to buy?" To come up with our answer, we established a "normal" affordability benchmark by looking back in time before the housing bubble and then highlighted some surprising facts about how each state compares to the others and to its own past. You can judge for yourself whether housing is expensive by using the chart below. It shows our hypothetical median debt- to-income ratio (median DTI), defined as the percentage of the median household's earnings needed for mortgage payments on a median-priced home. This is an excellent affordability metric because it takes into account mort - gage rates, local income, and local home prices. It is a hypothetical calculation because it is not based on actual mortgages. The first thing you may notice is that the worst years for afford - ability were the early 1980s when mortgage rates peaked at an eye- watering 18 percent. The best year was 2012, which, in hindsight, looks like a once-in-a-lifetime opportunity when prices overcor - rected well below fundamentals. More specifically, 2012 home prices nationally were roughly 12 percent below our estimate of fundamen- tal value. You can also see from Figure 1 how housing affordability has worsened since 2012 (due to higher home prices and interest rates), and the trend is likely to continue. We estimate that affordability will de - teriorate by another 10 percent by the end of 2019 as mortgage rates and home prices rise. That would push the national median DTI from 32 percent now to 35 percent. Location, Location, Location When it comes to affordability, the state of the market depends very much on which market you're discussing. City by City, State by State I n addition to showing the national average median DTI, the chart above highlights Denver, Colorado, and Dallas, Texas—two cities we are monitoring closely. Our concern stems from these cities' abnormally high home price increases over the past couple of years and because it is unusual to see affordability that is worse now than it was in 2006. Denver is the more worrying of the two because its affordability is the worst in 30 years and because the absolute level is high enough to disqualify many potential buyers who could have qualified just a few years ago. As for Dallas, even with home prices up a third in three years, affordability is still reasonable in absolute terms compared to the 1990s and to the nation as a whole. Nevertheless, it's troubling that Dallas is now more expensive than the national average, given that this is the first time that has been true since the unwinding of the 1980s oil-related housing boom and bust. Turning our attention from a few examples to all 50 states, we first compare their current median DTIs with each other and then compare those values to their own historic norms. The following map shows how Figure 1: Percentage of Median Household Income Needed to Cover Mortgage Payments on a Median-Priced Home. Source: U.S. Census Bureau/Freddie Mac/National Association of REALTORS®/Moody's Analytics/Arch MI

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