Arch MI: Home Affordability Is the Best in 30 Years

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According to the Winter edition of The Housing and Mortgage Market Review (HaMMR) from Arch Mortgage Insurance Co. (Arch MI), affordability remains strong even though home prices have increased around 50% nationally since 2012.

In fact, home buyers in most states will find median-priced homes to be more affordable than during the 1990s and early 2000s.

“States with higher real estate costs, particularly California and Hawaii, are exceptions, but there are also states experiencing the best affordability in 30 years or more,” says Dr. Ralph G. DeFranco, global chief economist for Arch Capital Services Inc. “This may be surprising because we tend to focus on home prices rather than affordability. Affordability accounts for the offsetting factors of low interest rates and a 28 percent increase in median household income since 2012. Historic norms are a more logical basis of comparison than the easier-to-recall market bottom in 2012, when prices had over-corrected below long-term fundamental values because of the foreclosure crisis.”

On a national basis, it takes about 29% of a median household’s income to make the monthly mortgage payment (assuming 10% down) – substantially less than the 34% average in 1987–2004, which is regarded as a historically “normal” housing market.

The new HaMMR also reveals that the areas with the highest price appreciation now tend to be smaller cities like Chico, Calif., and Jacksonville, N.C., as price increases slowed in many larger cities.

The quarterly Arch MI Risk Index, a statistical model based on nine indicators of the health of local housing markets, suggests the probability of home prices declining over the next two years is very low (10%) compared to the average of the past 30 years (20%).

The states with the highest risk of having lower home prices in two years are Colorado and Oregon, both at 24%, followed by California at 22%, Washington at 21% and Alaska at 19%.

Among the 100 largest metros, the Miami area has the highest Risk Index value (36%), followed by Lakeland, Fla. (35%); Denver (34%); Riverside-San Bernardino-Ontario, Calif. (30%); and Portland, Ore. (27%).

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