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What Cities Spend The Most Income On Housing?

Published on Thursday - August 21, 2014

It wasn’t long ago that experts were predicting mortgage rates to exceed 5% by the end of this year. Perhaps even more importantly, housing prices were expected to continue their rapid appreciation in nearly every region of the country. However, in a surprising turn of events, mortgage rates recently hit their lowest level of the year and the rate in which homes were appreciating appears to be cooling down. For all intents and purposes, the latest figures acknowledge that now is a great time to buy. Unfortunately, that is not the case in every market. There are still several markets in which sticker shock is a very real scenario. Home prices took a dramatic jump last year, fueled by all-cash investors on the low end of the market. While the gains are finally easing, there are still some markets where housing remains too expensive.

According to a recent report issued by Zillow, the least affordable markets in the United States all reside in the borders of California. In Los Angeles, it takes nearly 43 percent of the average resident’s income to afford just the median-priced home. It is not much better in San Francisco, or in San Diego.

“A lot of buyers are priced out of the market, so we’re seeing a lot lower traffic,” said David Fogg, a real estate agent in Burbank. “They’re all talking about how much property values have gone up just in the past year. As a result, many of them aren’t able to buy right now.”

According to a statement made by Fogg, higher home prices may be the result of current mortgage rates. As recently as this past week, fixed mortgage rates for most home loans bottomed out. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage dropped to 4.12% from 4.14% in the previous week. No more than a year ago, the rate on a similar mortgage was approximately 4.40%. Lower mortgage rates, on the other hand, may be giving buyers more purchasing power. Despite mortgage applications experiencing a 10% decline in the past year, the dollar amount they have been approved for is down just 1%. This would lead us to believer that those receiving mortgages are either buying more expensive homes or getting larger loans. The average rate on a jumbo mortgage is actually lower than that of a conventional loan; historically it is the other way around.

Not surprisingly, however, California is not the only area where housing remains unaffordable. New York, Denver, Seattle and Boston are all experiencing similar trends. In fact, the following is a list of the 10 least affordable cities for housing (based on the share of the average income needed to afford an average home):

  • Los Angeles, CA (42.6%)
  • San Francisco, CA (42.6%)
  • San Jose, CA (39.5%)
  • San Diego, CA (35.5%)
  • New York, NY (25.8%)
  • Sacramento, CA (25.6%)
  • Riverside, CA (24.5%)
  • Boston, MA (23%)
  • Seattle, WA (22.7%)
  • Portland, OR (21.8)

Fortunately, homes are relatively affordable across the country, if prospective buyers can afford a sizeable down payment and have good enough credit. Markets in Texas, Atlanta and Detroit are considerably more affordable than those on the list above. In areas that are too expensive, soaring rents are being blamed.

“The health of the for-sale market is directly tied to the rental market, where affordability is really suffering” said Zillow Chief Economist Stan Humphries. “As rents keep rising, along with interest rates and home values, saving for a down payment and attaining homeownership becomes that much more difficult for millions of current renters, particularly millennial renters already saddled with uncertain job prospects and enormous student debt.”

During the housing crash, home prices were the subject of considerable declines. However, rents neglected to suffer the same fate. In fact, in recent years, rents have reached record highs. According to another report issued by Zillow, Renters signing a lease at the end of the second quarter paid 29.5 percent of their income to rent, compared with 24.9 percent in the pre-bubble period. Rents are now less affordable than historical norms in 88 out of the nation’s 100 largest housing markets.

Surprisingly, while mortgage rates are the lowest they have been all year, fewer mortgage applications are being filed. In fact, mortgage applications are down 11% from the same time last year.

“Lower prices, a slight easing of credit standards, a better pace of job hiring and more inventory on the market helped to lift [home] sales, but I still can’t reconcile why mortgage applications to buy a home, according to the MBA, is still plumbing six-month lows,” noted Peter Boockvar, chief market analyst of The Lindsey Group. “I think it still points to a market whose recovery remains uneven.”

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