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54 | Th e M Rep o RT o r i g i nat i o n s e r v i c i n g a na ly t i c s s e c o n da r y M a r k e t ANALYTICS THE LATEST Home Prices outpacing incomes in More Markets Are new home price bubbles forming, or will we soon see appreciation plateau? M ore than one in five U.S. housing markets had surpassed their local historical home affordability average as of October, according to a report released last month by property information firm RealtyTrac. Out of 475 U.S. counties analyzed by the company, 98, or 21 percent, registered a higher affordability percentage than their historical average. (Affordability percentage is defined by RealtyTrac as the percent of median income needed to make monthly payments on a median- priced home with a 10 percent down payment.) The group includes a number of markets where supply and demand conditions have sent prices skyrocketing—including California's Los Angeles, Alameda, and Orange counties—and other areas where local economic condi- tions have boosted the housing market, such as Texas' Harris, Dallas, and Travis counties. "While 99 percent of markets have not returned to the irratio- nal affordability levels during the previous housing bubble, one in five markets have now exceeded their historical affordability norms, which is a strong sign that either a new home price bubble is forming in those markets or that home price appreciation will soon plateau until incomes can catch up," said Daren Blomquist, VP at RealtyTrac. In addition, 58 counties—12 per- cent of all markets analyzed—posted a median home price in October that was higher than the median recorded at their bubble-era peaks, and values are continuing to rise. However, with interest rates still low and incomes slowly coming up, only six counties are currently considered less affordable now than they were before the crash, accord- ing to RealtyTrac: • Suffolk County, Massachusetts (Boston) • Travis County, Texas (Austin) • Jefferson County, Alabama (Birmingham) • Brazos County, Texas (College Station) • Allegan County, Michigan (Holland) • Montgomery County, Tennessee (Clarksville) Across all counties, buying a median-priced home in October re- quired 26 percent of median income on average, down from an average of 41 percent during the bubble. RealtyTrac isn't the only firm reporting a decline in affordabil- ity nationwide. According to Interest.com's 2014 Home Affordability Study, middle-income families can afford a median-priced home in fewer than half of the country's 25 largest metropolitan areas. While home- price gains have slowed to a more reasonable rate of 4 percent nation- ally over the past year, they're still outpacing wage growth. Incomes have picked up just 2 percent, Interest.com pointed out. "The bottom line is that buying a decent home remains a difficult or unobtainable dream for Americans in many of the nation's largest cities," said Mike Sante, managing editor at Interest.com. "In those cities with the least affordable housing, the failure of paychecks to keep up with rapidly rising housing costs is reaching crisis proportions." In some cities, Sante says it's not uncommon for families to spend more than half of their income just on housing costs. In its 2014 survey, Interest.com found only a handful of markets where median household incomes exceed the cost of a median-priced home: Minneapolis-St. Paul, St. Louis, and Atlanta. Factoring in average property taxes, insur- ance costs, consumer debt, and mortgage rates, median incomes in those markets came in above the minimum amount required to purchase a median-priced home by at least 20 percent. Minneapolis-St. Paul ranked the highest in this year's affordabil- ity study. At $67,194, the median income in the Twin Cities metro outpaces the minimum amount needed to buy a median-priced house by 23.2 percent. On the other hand, San Francisco ranked as the least affordable market in Interest.com's study, taking the bottom spot for a second straight year. The City by the Bay boasts a median home price of $769,600, the nation's highest. A family earning the median income of $355,703 could only afford a home that was less than half of that median price. "I've even had San Franciscans tell me that they must devote 70 percent of what they make to keep a roof over their head—and they were renting. Owning is out of the question," Sante said. Joining San Francisco as some of the nation's least affordable hous- ing markets are San Diego, Los Angeles, New York, and Miami. Besides having higher-priced homes than many other areas, Interest.com says all of these metros have something else in common: They're hemmed in by oceans or mountains, leaving little room to develop new housing. While those markets are likely to remain on the pricey side for the foreseeable future, analysts expect the ongoing slowdown in price growth will help level things out. According to the latest measure of appreciation from FNC Inc., house prices across the country dropped 0.3 percent month-over-month in September, marking the first decline in two and a half years. Within a day of FNC's index release, Arch Mortgage Insurance Company (Arch MI) issued its own report that the probability that home prices will drop in the next two years continued to fall in second quarter of 2014, reflecting in- creasingly stable market conditions. Looking at economic and hous- ing market indicators in the second quarter, Arch MI says there's a 13 percent chance national home prices will decline in the next two years, down from the company's summer estimate of 15 percent. "The bottom line is that buying a decent home remains a difficult or unobtainable dream for Americans in many of the nation's largest cities." — Mike Sante, Interest.com