Rising home prices across the Valley have created a windfall for homeowners, but as owners seek to capitalize on appreciation, many are finding homes more difficult to afford.
Although homes are still within the financial reach of many, buyers are finding less wiggle room to manage their payments, the Arizona Real Estate Center at Arizona State University reported Tuesday. According to the center, the housing affordability index of existing homes dropped from 126 in 2003 to 114 last year across the Valley.
The index is based on a formula that includes interest rates, median sales prices and monthly gross income. Higher numbers suggest homes are more easily affordable, while lower numbers suggest that homes are less so for a typical family, said Jay Butler, the center’s director and an ASU professor. The new home index dropped from 133 in 2003 to 102 last year. "Obviously, homes are still being bought and sold. But this index helps create a general impression of what’s happening," Butler said.
The number 100 means that a family that has the median income for an area can afford the median-priced home with the prevailing set of interest rates and points, Butler said. "We talk about how interest rates have been state. But the problem is the rapid increase in home prices. Even with low interest rates, that has dramatically impacted affordability," Butler said.
In January 2003, the median home price across the Valley was $156,000. With a 15 percent down payment at a 5.3 percent interest rate, that amounts to a mortgage payment of about $735. This past December, median home prices hit $190,000 while interest rates increased to 5.5 percent, resulting in a monthly mortgage payment of about $920.
"What people focus on when they buy a house isn’t the interest rates. It’s what is the monthly payment. That’s what they focus in on," Butler said.
Higher mortgage payments mean less cash for other household needs. And if both interest rates and home prices continue to increase, the combination will pose challenges for home buyers, Butler said. With fewer qualified buyers, the pace of the housing market could slow as a result.
"If you reduce your affordability too greatly, too quickly, people can’t afford to buy the homes. This is an indicator that we may see some stabling of the median home price or maybe some falling off of the median home price," Butler said.
Elaine Sans Souci, a real estate agent with Team Sans Souci, is seeing the impact of rising home prices firsthand as she tries to find houses for entry-level clients.
"What I am finding is that a kid that makes $40,000 or $42,000 out of college can’t afford anything other than a townhouse," Sans Souci said. "The prices are escalating so rapidly that anything under $140,000 is built before the 1950s. It’s old and it’s ugly. If you can even find it."