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RealtyTrac and Clear Capital have released a joint report showing that buying a home was at the most affordable level in two years in the first quarter of 2015 despite the average U.S. home price increasing at more than twice the pace of the average weekly wage nationwide over the past year.
For the report, RealtyTrac analyzed recently released Q1 2015 average weekly wage data from the Bureau of Labor Statistics and average prices for single family homes and condos derived from publicly recorded sales deed data collected by RealtyTrac in 582 U.S. counties with sufficient home price data. Average interest rates on a 30-year fixed rate mortgage came from the Freddie Mac Primary Mortgage Market Survey. Clear Capital analyzed data from its Home Data Index to determine counties at highest risk and lowest risk based on affordability and potential for price growth.
Average home price appreciation outpaced average wage growth between the first quarter of 2014 and the first quarter of 2015 in 397 out of 582 (68 percent) U.S. counties analyzed for the report. But during the same time period, the average interest rate on a 30-year fixed rate mortgage dropped 57 basis points (13 percent), from 4.34 percent in the first quarter of 2014 to 3.77 percent in the first quarter of 2015. The drop in interest rates—along with wage growth outpacing home price appreciation in 32 percent of counties—meant buying a home in the first quarter of 2015 required a smaller share of the average wage compared to a year ago in 339 of the 582 counties (58 percent).
“Although home prices continue to outpace wage growth in the majority of local markets, this analysis somewhat surprisingly shows that affordability is actually improving in most markets thanks to falling interest rates and slowing home price growth, which is allowing wage growth to catch up in some markets,” said Daren Blomquist, vice president at RealtyTrac. “At the national level, buying an average-priced home in the first quarter of 2015 was the most affordable it’s been in two years and nearly twice as affordable as it was in the second quarter of 2006—when affordability was its worst in the past 10 years. At the local level we’re seeing several bellwether markets where wage growth matched or even outpaced home price growth over the past year.”
Major markets where wage growth outpaced home price growth in the first quarter—counter to the national trend—included Cook County, Ill. in the Chicago metro area; Orange County, Calif. in the Los Angeles metro area; Brooklyn, N.Y.; Fairfax County, Va. in the Washington, D.C., metro area; and Riverside County in Southern California, where the average weekly wage in the first quarter was up 10 percent from a year ago, double the 5 percent growth in average home prices during the same time period.
Assuming a three percent down payment, monthly payments on an average-priced U.S. home—including property taxes, home insurance and private mortgage insurance (PMI)—required 36.5 percent of the average wage nationwide in the first quarter of 2015, down from 37.6 percent in the previous quarter and down from 37.4 percent in the first quarter of 2014 to the most affordable level since the first quarter of 2013, when affordability was 33.5 percent.
Buying a home nationwide was at the most affordable level in the last 10 years in the first quarter of 2012, when monthly house payments required 32.0 percent of average wages, while buying a home nationwide was at the least affordable level in the last 10 years in the second quarter of 2006, when monthly house payments required 70.7 percent of average wages.
Since bottoming out in the first quarter of 2012, the average U.S. home price has risen 24 percent while the average weekly wage nationwide has risen seven percent during the same time period and the average interest rate on a 30-year fixed rate mortgage has dropped five percent.
The average U.S. home price is still 12 percent below where it was in the second quarter of 2006, when buying a home was at the least affordable level in the last 10 years. Meanwhile the average wage nationwide has risen 34 percent and the average interest rate on a 30-year fixed rate mortgage has dropped 44 percent during that same time period, resulting in a 48 percent improvement in affordability.
Among all 582 counties analyzed in the report, only 20 (three percent) exceeded their 10-year affordability averages in the first quarter of 2015, including counties in the Nashville, Lansing, Michigan, Cincinnati, Memphis, Washington, D.C., and Atlanta metro areas.