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Amy Hoak's Home Economics
April 12, 2010, 2:28 p.m. EDT · Recommend · Post:
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Conan is back -- but it might not matter
By Amy Hoak, MarketWatch
CHICAGO (MarketWatch) -- The housing-market crisis has had one positive outcome: Homes are more affordable, now that prices and mortgage rates are lower, and some buyers can claim a tax credit worth up to $8,000. But by some measures, housing is still out of reach for many Americans.
At least one popular measure of housing affordability, an index from the National Association of Realtors, finds affordability at an all-time high. But, while home prices may have come down to where they look like relative bargains and low mortgage rates add to that appeal, whether a home is affordable to you depends on many other factors, not all of which are taken into account in any one calculator.
New report suggests housing turns in spring 2011, further bolstering economic recovery, Barrons.com's Bob O'Brien reports.
For instance, transportation expenses can quickly render a low-cost housing choice unaffordable when the price of commuting and reaching other destinations such as shopping and school are included. And while national affordability conditions may be great, local markets can vary widely, meaning many median-income service and community workers can find themselves priced out of the towns in which they are employed.
According to the National Association of Realtors' index, affordability hit a record high nationwide last year. In 2009, the index was 171.6, meaning a family with the median income had 171.6% of the income necessary to qualify for a mortgage loan on a median-priced home -- well more than what they actually needed. That's up from an index reading of 115.4 in 2007.
The index assumes a 20% down payment, and that the combination of monthly mortgage principal and interest doesn't exceed 25% of median household income each month. The median household income in 2009 was an estimated $61,845 a year; the median existing-home price was $172,100, according to NAR, which began the index in 1981.
"The National Association of Realtors' measure is useful over time to track where we are in the cycle and long-term affordability," said Susan M. Wachter, professor of real estate and finance at the University of Pennsylvania's Wharton School. "What the NAR numbers today point to... are factors that make homes exceedingly affordable."
Still, some say there are gaping holes in this affordability calculation.
For instance, one problem cited involves how much it will end up costing a family to get from home to work, school, the grocery store, a place of worship, and anywhere else they might travel regularly.
"Affordability, in terms of the purchase price or the rental price of a home is a pretty good deal right now if you have money in your pocket. But the cost of transportation hasn't gone down," said Scott Bernstein, president of the Center for Neighborhood Technology, an organization that researches solutions for transportation, community development, energy, natural resources and climate change issues.
According to the center's affordability index, only 40% of communities are affordable to the typical household when transportation costs are included. That assumes 45% of a household's income goes toward the combination of monthly housing costs, including utilities (for either a rental unit or an owner-occupied home), as well as transportation costs.
By comparison, 69% of communities are considered affordable when transportation costs aren't factored in, according to the center's index. That assumes 30% or less of household income goes to paying for housing costs.
The Center for Neighborhood Technology's index covers 337 metropolitan areas across the country, or 80% of the U.S. population.
A typical household's transportation costs can range from 12% of household income in areas with walkable streets, access to transit, and a wide variety of stores and services, to as much as 32% in areas where people need vehicles to get nearly everywhere, according to the center. In some of the most far-out exurbs, transportation expenses are higher than the cost of shelter.
And if gasoline spikes again this summer, that will put even more pressure on car-dependent households. See story on higher gas prices expected this summer.
People should estimate their transportation costs before deciding where to live, the organization said. It provides a map on its Web site to help. Visit the Housing and Transportation Affordability Index map.
Another problem with traditional home affordability measures is that they don't boil down what affordability conditions actually mean for workers in various professions.
In 86 of the 208 homeownership markets studied by the Center for Housing Policy in its recent report, "Paycheck to Paycheck: Wages and the Cost of Housing in America," police officers cannot afford to purchase the median-priced home on their salaries.
Elementary school teachers can't afford the median-priced home in 83 communities and licensed practical nurses can't afford one in 146 communities, according to the report, which assumes a 10% down payment, and that households don't pay more than 28% of income on mortgage, property taxes and insurance. View the report on the Center for Housing Policy's Web site.
That said, the income needed to purchase a median-priced home dropped in 93% of 208 markets between 2008 and 2009, according to the report.
"In areas where people were only slightly priced out, they may now be able to purchase a median-priced home," said Maya Brennan, senior research associate with the Center for Housing Policy. "Some of the more expensive markets are so much more expensive and so far beyond what the workers there can afford. In those markets, we need to make sure that in the minimum, apartments are affordable," she said.
The study also found 24 areas where the monthly payment costs for a median-priced home were less than the fair-market rent for a two-bedroom apartment. These markets were "mainly in Ohio, Florida and a handful in other areas hard-hit by foreclosures," Brennan said
But while the cost of owning may be more affordable than renting in these places, employment security can be a huge factor in whether residents who have the finances to buy decide to make the purchase. Households must decide whether they're prepared to stay in the home regardless of what happens in the labor market, Brennan said, and some may opt to rent instead.
Amy Hoak is a MarketWatch reporter based in Chicago.
Conan O'Brien is poised to return to television on Time Warner Inc.'s TBS channel -- but can he make a splash?
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