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TH E M R EP O RT | 51 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T DATA THE LATEST What Will Happen with Affordability in 2017? Affordability could come into jeopardy in 2017, and NAR Chief Economist calls on builders to help salvage it. T ight inventory has kept upward pressure on home prices, but affordability has been sustained for much of 2016 by solid job growth and near- record low mortgage rates. But now that mortgage rates are on the way back up, what will happen to affordability in 2017? Home sales already slowed down in the third quarter, accord - ing to the National Association of Realtors (NAR), because supply has not kept up with sales. "If mortgage rates start to rise heading into next year, prospec - tive buyers could face weakening affordability conditions in their market unless supply dramatically improves," NAR Chief Economist Lawrence Yun said. "That's why it's absolutely imperative that home builders ramp up the produc - tion of more single-family homes to meet demand and slow price growth." A study of 27 markets from HSH.com using NAR's third-quar - ter data for median home prices and HSH.com's third-quarter aver- age 30-year FRM found that the most affordable market, based on the salary required to afford the base cost of owning a home (prin - cipal, interest, taxes, and insurance) was Pittsburgh, where a salary just shy of $32,000 can buy a median- priced home of $140,000 with an interest rate of 3.49 percent. Markets in the Midwest (Cleveland, Cincinnati, St. Louis, Detroit) ranked two through five behind Pittsburgh for most affordable. The least affordable market was San Francisco. Four of the six least affordable markets were in California. "(Affordability) is dependent upon what type of job growth is available in the area, what type of income growth is available in the area, how the housing market is comprised in that area—is there more or less housing stock that's available," said Keith Grumbinger, VP of HSH.com. "And you look at some of the most affordable areas, and you can tell that these are heavily industrial areas that have had net population outflows over many years. Essentially, there's a lot of housing stock available relative to the number of folks that are looking to buy homes, and that has improved affordability to a very real degree in those areas." Part of the reason the supply has been so low is because of the large number of homes bought by investors in the last couple of years and then turned into rental housing, according to Grumbinger. Some of those homes could get flipped back into marketplace when the investor decides to sell, which could create additional inventory. While Yun said it is imperative for builders to create more single- family inventory, will that actu - ally happen? Grumbinger said he doesn't see a lot of new inventory being built in 2017 due to a variety of issues, including a lack of build - able land, a lack of opportunity to build large divisions, and the fact that the most populous markets are already "packed." Now that mortgage rates are ris - ing again, Grumbinger said, "Low mortgage rates can no longer offset quickly rising home prices. With income growth modest in most marketplaces, or at least on the aggregate, income growth being modest, we think that affordability is slowly being eroded as we go. That's becoming increasingly as much of a problem as is a lack of inventory for homebuyers that want to buy homes."