By Steve Kerch, CBS.MarketWatch.com
CHICAGO (CBS.MW) -- Housing affordability improved in the fourth quarter because of rising family income and a seasonal decline in home prices, the National Association of Realtors said Monday.
The association's composite housing affordability index stood at 139.2 in the fourth quarter of 2003, up 2.6 percentage points from 136.6 reported in the third quarter, but down 1.1 points from the same period a year earlier.
The index shows the nation's typical household had 139.2 percent of the income needed to purchase a home at the fourth-quarter median existing-home price, which was $171,600.
This index measures affordability factors for all homebuyers making a 20 percent down payment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home.
The fourth-quarter median family income was projected to be $53,996. That income provides the buying power for a house costing $238,900 -- well above the median price
David Lereah, the association's chief economist, said the seasonal decline in the median home price results is a normal occurrence.
"There's usually a higher ratio of singles and childless couples purchasing in the fourth quarter, and they generally buy more moderately priced homes," he said. "This means fourth-quarter median prices experience a seasonal dip from the third quarter."
Even so, the median price was 6.6 percent higher than the fourth quarter of 2002.
But that level of home-price appreciation isn't likely to materialize in 2004, which should help to keep affordability relatively high. Realtors expect home prices to increase about 4 1/5 percent this year.
"Although mortgage interest rates are expected to rise, particularly in the second half of the year, general affordability conditions should be favorable in most of the country throughout 2004," said association President Walt McDonald.
According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 5.83 percent during the fourth quarter, up from 5.66 percent in the third quarter; it was 6.11 percent in the fourth quarter of 2002.
Affordability for first-time homebuyers also improved in the fourth quarter, rising to 79.9 from 78.6 in the third quarter; it was 1.5 points below the fourth-quarter 2002 index.
The association's first-time homebuyer affordability index showed that a typical first-time buyer household, aged 25 to 44, with an income of $30,436, had 79.9 percent of the income needed to purchase a typical starter home with a 10 percent down payment. The median starter-home price was $145,900 in the fourth quarter.
The typical first-time buyer could afford a home costing $116,600, which is below the median price in most metropolitan areas, McDonald said.
"The interesting thing is first-time buyers account for four out of ten transactions, so they're finding ways to do it -- either with a small starter house, a condo or some kind of sharing arrangement," he said.
The table below shows the approximate home price a family earning the specified income could afford making a 20 percent down payment, with no more that 25 percent of gross income allocated for principal and interest payments. Variables include the type of loan and interest rate.
For first-time buyers making very small down payments (about 3 percent), the affordable price is close to the loan amount for a given income.