A Tale of Two Markets: Affordability and the State of the Nation’s Housing in 2010
For first-time homebuyers with good credit, stable employment, and savings for a down payment, buying a home is more affordable than it has been in decades. For everyone else, however, lower home prices have been a disaster.
By Daniel McCue Posted on October 17, 2010
If there’s any bright side to this protracted housing crisis, it’s that dramatic declines in home values have greatly improved affordability for first-time homebuyers. From early 2006 to early 2009, the U.S. median home price dropped from $227,100 to $166,100. Combined with lower interest rates, that means that monthly payments for a newly purchased home at the U.S. median price with a 90 percent mortgage declined from $1,300 per month to just $800. By 2010, mortgage payments on a median-priced home (assuming a 10 percent down payment) were less than 20 percent of the U.S. median household income for the first time since records began in 1971. Mortgage payment to income ratios in over 80 percent of the nation’s metropolitan areas are even significantly below averages from the 1990s, well before the housing boom.
But many households are, at best, not in a position to benefit from lower prices. The recent crisis has underscored the fact that the ability to purchase a home does not guarantee the ability to live affordably.
Those who already owned their homes have certainly not been helped by the wave of foreclosures and the price declines, but the effects have been worst in low-income and minority neighborhoods.
According to the Mortgage Bankers Association, from the first sign of a spike in defaults in early 2007 through the first quarter of 2010, there have been over 6.1 million foreclosure notices issued to homeowners around the country. Delinquencies and foreclosures have been highly concentrated in a small number of states and even more concentrated at a neighborhood level. According to our analysis of First American CoreLogic data, of loans originated in 2006, over two-thirds of all delinquencies occurred in just 25 percent of zip codes, while the top 1 percent of zip codes held over 10 percent of delinquent loans.
Low-income neighborhoods have seen the highest delinquency rates, minority neighborhoods of all income levels have significantly higher delinquency rates than mixed or white neighborhoods, and low-income minority neighborhoods have had the worst delinquency rates of any—at fully 27.5 percent of all loans. Contributing to these high delinquency rates is the fact that low-income minority neighborhoods saw much higher levels of high-cost, subprime lending. According to HUD, half of the loans in a median low-income minority census tract were high-cost loans, while the median share of high-cost lending in low-income white tracts was one-third.
Even for those who have not yet faced foreclosure, drastic price declines have signaled a dramatic destruction of wealth, especially for low-income homeowners, for whom their home is usually their largest asset. In almost all metropolitan areas covered by the S&P Case-Shiller Tiered House Price Index, average price declines for low-end homes through the downturn were more than 50 percent greater than declines among high-end homes.
According to First American CoreLogic, by the first quarter of 2010 over 11 million homeowners were “underwater”—owing more on their mortgages than their homes were worth. Given that they also entered the downturn with the least equity in their homes, low-income and minority homeowners were likely to be overrepresented in this group. Underwater homeowners are in the tenuous position of not being able to refinance or sell without providing additional money to their lenders, which increases their risk of foreclosure given any loss of income or increase in adjustable rate mortgage payments.
Daniel McCue is a senior research associate at the Joint Center for Housing Studies at Harvard. He is involved in much of the research and major reports produced by the Center, most notably in the signature annual State of the Nation’s Housing reports, for which he is project manager and lead author. He is a graduate of Williams College in Williamstown, Massachusetts and holds a Master in Urban Planning degree from the Harvard University Graduate School of Design.