NAHB recently released its 2022 priced out estimates, showing how higher prices and interest rates affect housing affordability. The new estimates show that 87.5 million households (roughly 69 percent of all U.S. households) are not able to afford a new median priced new home in 2022, meaning their incomes are insufficient to qualify for a mortgage under standard underwriting criteria. If the median new home price goes up by $1,000, an additional 117,932 households would be priced out of the market. These 117,932 households would qualify for the mortgage before the price increase, but not afterward.
The underwriting criterion used to determine affordability is that the sum of mortgage payments, property taxes, homeowners and private mortgage insurance premiums (PITI) during the first year is no more than 28 percent of the household’s income. Key assumptions include a 10% down payment, a 30-year fixed rate mortgage at an interest rate of 3.5%, and an annual premium starting at 73 basis points for private mortgage insurance.
As usual, NAHB’s latest update includes priced out estimates for all states and metropolitan areas. The priced out numbers vary with both the sizes of the local population and the affordability of local new homes. Among all the states, California registered the largest number of households priced out of the market by a $1,000 increase in the median-priced home in the state (12,411), followed by Texas (11,108), and Florida (6,931), largely because these are the country’s three most populous states.
The metropolitan area with the largest priced out effect, in terms of absolute numbers, is New York-Newark-Jersey City, NY-NJ-PA, where 4,734 households would not be able to qualify for a mortgage to purchase a new median-priced home if its price goes up by $1,000. This is largely because New York metro area, where the median-priced new home is only affordable to 14% of households, is the most populous metro area with roughly 8 million households. Chicago-Naperville-Elgin, IL-IN-WI metro area registers the second largest number of priced-out households (4,273), followed by Philadelphia-Camden-Wilmington, PA-NJ-DE-MD metro area (3,235). Compared to New York, the median priced homes in Chicago or Philadelphia metro areas are relatively more affordable to begin with. Around 33% of households in Chicago and 45% of households in Philadelphia metro area can afford new median-priced homes there.
More details, including priced out estimates for every state and over 300 metropolitan areas, and a description of the underlying methodology, are available in the full study.
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Hello, I was checking the math and I could be wrong but believe your data is factoring a 50bps on PMI and not 73bps. If using a 73bps, this actually helps your narrative and making more homes unaffordable for households. Just though to clarify that.
But one actual question that I have is, why are you using 28% DTI to determine affordability in today’s market? Of course this is the Ideal front end ratio and related to the old rule 28/36 (28% front end and 36% backend ratios).
Today banks are willing to go <43% conventional, FHA allows up to 58%, Fannie up to 50% and VA up to 55%. So, people are stretching themselves today and banks are allowing it.
Steve, the analysis uses 73 bps. The underwriting parameters have remained fixed for some time to allow comparisons.
Yeah the math checks out. Looks like they are using 50bps in the chart.
Probably a more helpful data point is “DTI of a median house with a median income”.
We used 73bps as the private mortgage insurance rate in our calculation. The amount of private mortgage insurance is treated as part of the mortgage payment (PI) in the chart, as it depends on the amount of loan. The tax and insurance (TI) in the chart includes the property tax and homeowner insurance, which are closely related to the property value.
What happens if you use the most current interest rate? According to Bankrate.com “For today, Monday, February 21, 2022, the average 30-year fixed-mortgage rate is 4.19%, up 19 basis points over the last seven days. If you’re looking to refinance, the average 30-year refinance rate is 4.17%, up 14 basis points over the last seven days”
The article linked in the post has a discussion of alternative interest rates.