Buying a Home: Where Housing Is (and Isn't) Most Affordable

Between rising mortgage rates and recovering home prices, housing has become less affordable so far in 2013. However, things aren't the same for everybody. The affordability of housing depends on the buyer's location and personal circumstances.

Housing is still a relative bargain in many markets, thanks in part to low 30-year fixed mortgage rates. Comparing today's mortgage rates to rates throughout history, they are still quite low, despite their recent run-up. As for home prices, while these have bounced back from the bottom, they are still well below the peak of the housing bubble in most markets.

In short, while buying a home has gotten a little tougher, housing is by no means the most expensive ever. Further, since real estate finances always come down to specifics, it is important for home buyers to know how their location and personal circumstances may affect the affordability of housing.

Location and Housing Affordability

Everyone knows that real estate prices vary according to location, but so do average incomes. The affordability of housing is a function of both the cost of real estate and how much the buyer earns. To show some examples of housing affordability, calculated average single-family home prices as a multiple of average incomes in the ten largest metropolitan areas in the United States. This analysis was based upon:

  • Average wage figures from the Bureau of Labor Statistics.
  • Population figures from the US Census Bureau.
  • Average metropolitan area housing prices from the National Association of Realtors.

Based on the above, here are the ten largest metropolitan areas in the United States, ranked from where housing is most affordable to where it is least affordable:

  1. Atlanta (most affordable housing among the ten largest metro areas)
  2. Houston
  3. Dallas
  4. Chicago
  5. Philadelphia
  6. Miami
  7. Washington, DC
  8. Boston
  9. New York
  10. Los Angeles (least affordable among the ten largest metro areas)

Washington, DC is a good example of why it is important to look at both real estate prices and average incomes when measuring the affordability of housing. Median home prices in the nation's capitol are actually higher than in Boston, New York, or Los Angeles. However, since average wages area also higher in Washington, families may be better able to afford homes there than in those three other major cities.

Individual Factors in Housing Affordability

Clearly, location matters in determining housing affordability, but even in a given area, affordability varies widely from family to family because of their personal circumstances. Here are some examples of how these can affect affordability, both now and in the future:

  1. Household income. Obviously, high earners can find buying a home easier even in pricy areas, but by the same token, living in an area with low real estate prices doesn't necessarily make a home easily affordable for people with low incomes.
  2. One income or two? For households with two incomes, there's not only a boost to affordability, but there is also more stability in having two sources of income rather than just one.
  3. Stability of income. Those earning a steady wage in a thriving industry can often secure higher mortgage amounts because their income is consistent. However, applicants who are self-employed or on commission may have income fluctuations that make budgeting more difficult. This can cause them to be approved for lower mortgage amounts.
  4. Long-term career prospects. Mortgages are generally 15-year or 30-year obligations, so applicants should consider long-term career prospects in determining how affordable a home would be in the long run. Those with marketable skills in robust industries have the advantage, as do those in careers that offer steep income increases with experience. On the other hand, people in declining industries or professions with less certainty in their long-term career prospects should be more conservative when they take a mortgage to pay for a house.
  5. Existing financial obligations. Naturally, the mortgage isn't the only thing in a monthly budget. The higher and less flexible an applicant's other obligations, the more cautious he or she must be to make sure that a new mortgage doesn't put cash flow into the red.

The takeaway here is that when buying a home, borrowers must consider more than prices and mortgage rates. Looking at the big picture when evaluating affordability helps make sure the house fits the budget.

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