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Freddie: What Feeds the Affordability Perception?

Affording a mortgage payment is possible for many prospective homeowners. Why then, by all accounts, is unaffordability plaguing the market?

Researchers at Freddie Mac offered several takes on the answer in its latest Insight, suggesting that homebuyers having a hard time finding reasonably-priced listings are perceiving homes as unaffordable—a view that appears largely based in reality, if their only options to date have been out-of-reach stock. Moreover, the high likelihood for competition (i.e., bidding wars) is off-putting, both for first-time homebuyers and for sellers again entering the market. The latter’s hesitation, notedly, is tamping down already tight inventory.

“Thanks to very low mortgage rates, monthly mortgage payments are affordable for the average household despite currently high house prices,” says Sean Becketti, chief economist at Freddie Mac. “Nevertheless, hurdles to homeownership arise from the difficulty of finding a house. The supply of homes for sale is very tight, especially starter homes, and underwriting requirements are more rigorous than they were in the past.”

Would-be homeowners are also not confident about their prospects because their incomes have stayed relatively flat compared to home prices—more evidence making the case for unaffordability, according to the researchers. Incomes have grown by an average 2.4 percent annually since 2012; prices, however, have grown an average 6 percent.

Both incomes and prices, as well, contrast sharply depending on market. In the Kansas City, Mo., metropolitan area, for instance, the current median income is enough to afford a median-priced house in almost every zip code; in the San Francisco metropolitan area, the current median income is not enough to afford a median-priced house in any zip code.

First-time homebuyers are facing additional hurdles: a lack of awareness when it comes to costs beyond a mortgage payment (e.g., homeowners insurance, property taxes), and of savings for a down payment. Obtaining a mortgage, however, is their primary roadblock, especially for those who may not have the credit scores and/or on-paper, stable earnings needed to qualify. Student loan debt obligations, too, can adversely affect their debt-to-income (DTI) ratio. One or all obstacles are—or seem—insurmountable, further fueling a sense of unaffordability.

“Many potential first-time borrowers are stymied by variable employment and income histories and the challenge of accumulating a down payment while simultaneously paying down their student loans,” Becketti says. “In fact, a high level of household debt, particularly student debt, poses perhaps the largest obstacle to first-time homebuyers.”

Homeownership—stripped down to just the mortgage payment—is affordable, the researchers concluded, but challenged by barriers that play a hefty role in the home-buying process.

Perception, after all, is reality.

Source: Freddie Mac

Suzanne De Vita is RISMedia’s online news editor. Email her your real estate news ideas at sdevita@rismedia.com.

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