Housing affordability is slipping out of most Americans' grasp due to rising interest rates, increasing home prices and tightening credit, government-sponsored enterprise Freddie Mac says in its U.S. Economic and Housing Market Outlook for December.
‘While most housing markets still remain affordable, rising mortgage rates and rising house prices over the past six months are making it more challenging for the typical family to purchase a home without stretching beyond their means, especially in the Northeast and along the Pacific Coast,’ says Frank Nothaft, vice president and chief economist for Freddie Mac, in a statement.
‘Like most, we expect mortgage rates to rise over the coming year, so it's critical we start to see more job gains and income growth in the coming year,’ he adds. ‘This will help to keep payment-to-income ratios in balance – an important factor not only for first-time buyers but for sustaining homeownership levels among existing owners.’
For borrowers approved for a 30-year fixed-rate mortgage (FRM) at 4.4%, more than 70% of the country remained ‘affordable’ in the third quarter, according to Freddie Mac's analysis. Comparing affordability by region, all of the north central U.S. remained affordable in the third quarter, for example, while just 36% of the West remained affordable.Â
But affordability wanes quickly as interest rates rise: For borrowers approved for a 30-year FRM at a 5% interest rate (and with no change in prices/income), approximately 63% of the country would be affordable. At a rate of 6%, about 55% of the country would be affordable, and at 7%, only 35% of the country would be affordable.
The report notes that although average household mortgage debt in the U.S. inched up by about 1% in the third quarter, compared to the second quarter, American household income increased by nearly $2 trillion during that same period. What's more, existing homeowners' housing payment-to-income ratio fell to an average of 7.9%, its lowest level since 1980 – a positive sign for sustainable homeownership, Freddie Mac notes.
Meanwhile, interest rates continue to gradually rise. According to Freddie Mac's weekly Primary Mortgage Market Survey, the average rate for a 30-year FRM was 4.47% during the week ending Dec. 19 – an increase of about 0.7% compared to the previous week, when it was 4.42%. A year ago at this time, the 30-year FRM averaged 3.37%.
The average rate for a 15-year FRM was 3.51%, an increase of about 0.6% compared to the previous week, when the 15-year FRM was around 2.65%.
The average rate for a five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) was 2.96%, an increase of about 0.4% compared to the previous week, when it was around 2.94%. A year ago, the five-year ARM averaged 2.71%.
The average rate for a one-year Treasury-indexed ARM was 2.57%, an increase of about 0.5% compared to the previous week's average rate of 2.51%. At this time last year, the 1-year ARM averaged 2.52%.
‘Mortgage rates rose slightly leading up to the Federal Reserve's policy announcement,’ Nothaft says. ‘The statement indicated that the central bank would begin to trim its bond-buying program. The Fed noted that the economy expanded at a modest pace, but the unemployment rate remains elevated. In addition, housing starts in November rose to a seasonally adjusted annual rate of 1,091,000, the highest rate since February 2008. Permits were at a seasonally adjusted annual rate of 1,007,000 in November – 7.9 percent higher than in November 2012.’
In October, the Mortgage Bankers Association forecast that mortgage origination volume would decline by as much as 32% in 2014 – most of it in the form of declining refinancing volume – due mainly to rising interest rates.
At the time, MBA Chief Economist Jay Brinkmann predicted interest rates for 30-year FRMs would likely top 5% by the end of 2014 and may increase to 5.5% by the end of 2015.
Fannie Mae, Freddie Mac's larger sibling, offered a slightly more optimistic outlook on the housing market, saying in a report on Thursday that ‘the economy and housing market continue to transition to more normal levels of activity and are poised to gather further momentum heading into 2014.’
‘In particular, as uncertainty surrounding fiscal and monetary policy wanes, consumer spending and manufacturing activity should improve and contribute to additional housing growth,’ Fannie Mae says. ‘Real economic growth is expected to come in at approximately 2.2 percent for all of 2013, which is roughly in line with the [Fannie Mae] Economic & Strategic Research Group's forecast at the beginning of this year, with an increase to 2.7 percent expected next year.’
Doug Duncan, chief economist for Fannie Mae, says as the rate of unemployment declines, going into 2014, consumer spending will increase and economic conditions will improve.
‘Furthermore, consumer attitudes already appear to have recovered from the temporary government shutdown in the fall,’ he adds. ‘Strong October consumer spending growth and a jump in November auto sales should help build momentum for further spending growth in the fourth quarter. In addition, the November jobs report showed solid gains in hours worked and in earnings, pointing to stronger growth in wage-and-salary income and providing support for consumer spending.’
‘With regard to housing, we expect that the improving employment picture next year will be accompanied by a sustained increase in interest rates, which in turn will roll over into the mortgage market,’ Duncan adds. ‘While that will likely drag on housing growth expectations, we believe the housing recovery will continue on a modest upward trend toward more normal levels. Our forecast calls for additional home price increases next year, although declining investor demand and other factors are expected to slow the pace of appreciation. Overall, 2013 housing indicators have shown about the performance we expected and we believe that their gradual march toward normal will continue into 2014.’