Affordability Will Be Destroyed if Interest Rates Increase

Don’t forget, you can get access to the spreadsheets used to make the charts in this and other posts by becoming a member of Seattle Bubble.

It’s been a few months since we took a look at the local affordability index. So, let’s have a new look at all of our affordability index charts.

As of August, affordability is… not great for buyers. Median home prices have been on a steady increase, and despite still-crazy-low interest rates, the index has dipped below the “affordable” level of 100 for the last three months. The affordability index for King County currently sits at 97.3. An index level above 100 indicates that the monthly payment on a median-priced home costs less than 30% of the median household income.

King County Affordability Index

I’ve marked where affordability would be if interest rates were at a slightly more sane level of 6 percent—76.6, which is worse than any point outside of 2006 through mid-2008. If interest rates were anywhere near a “normal” level, we’d be right back into serious bubble territory.

Here’s a look at the index for Snohomish County and Pierce County since 2000:

Snohomish / Pierce County Affordability Index

As usual, Snohomish and Pierce are still seeing much higher levels of affordability than King County, but continue to follow the same general trend. The affordability index in Snohomish currently sits at 123.5, while Pierce County is at 159.7.

Tomorrow I will post updated versions of my charts of the “affordable” home price and income required to afford the median-priced home. Hit the jump for the affordability index methodology, as well as a bonus chart of the affordability index in the outlying Puget Sound counties.

Outer Puget Sound Counties Affordability Index

As a reminder, the affordability index is based on three factors: median single-family home price as reported by the NWMLS, 30-year monthly mortgage rates as reported by the Federal Reserve, and estimated median household income as reported by the Washington State Office of Financial Management.

The historic standard for “affordable” housing is that monthly costs do not exceed 30% of one’s income. Therefore, the formula for the affordability index is as follows:

Affordability Formula

For a more detailed examination of what the affordability index is and what it isn’t, I invite you to read this 2009 post. Or, to calculate your the affordability of your own specific income and home price scenario, check out my Affordability Calculator.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

17 comments:

  1. 1

    Hey the Increase is Only $130/MO on a $550K Loan

    Going from 4.5% to 4.75% on a 30 year fixed….if that’s the defining nature of interest rates’ increasing and a housing price collapse, should we even be talking affordability with that slim of a margin. IOWs, paying off the house has far more unknowns than that.

  2. 2
    FWIW says:

    There was a time when banks would not loan beyond 2.5 times annual salary and rates were seven, eight percent and far above. Stuff changes – people, rates, and prices. It”s a heady mix.
    Affordability has always been a relative concept.

  3. 3
    MD says:

    Yellen herself was asked if there’s a possibility that rates will stay at zero “forever.” She replied that she couldn’t rule it out.

    We may be reaching a point where our economy is so fragile, the Fed won’t be able to rates at all without everything crashing. I wouldn’t hold your breath for rates to return to “normal” anytime soon.

    And the housing bubble party goes on…

  4. 4
    Blurtman says:

    By MD @ 3:

    We may be reaching a point where our economy is so fragile,

    When will it become non-fragile?

  5. 5

    If interest rates went up to 6%(and they won’t, unless the national economy suddenly booms), the lack of affordability mean that a significantly larger number of people would not be able to afford the median priced house. Interest rates aren’t the only thing that effects housing prices, and interest rate changes may not have an immediate effect, but they do have an effect.
    The fact that rates have been so low has allowed people to keep buying higher and higher priced housing. I would guess that an increase to 6% would see prices dropping, and when prices start to drop, that’ll result in more people putting their homes on the market, increasing inventory. And then maybe the local real estate market will be healthy and balanced for a few weeks

  6. 6
    whatsmyname says:

    http://quickfacts.census.gov/qfd/states/53/53033.html

    With 38% of our housing units in multifamily, why would it make sense to match median income with median house price?

    The good news? According to this, Pierce County is affordable-and-a-half.

  7. 7
    ess says:

    Think we have a problem? Check out our “friends to the north”.
    And as the article says – all the West Coast cities have an “affordability” issue.
    But again referencing the article – to live in the most beautiful city in the world – it will cost more. While Vancouver BC may be the most beautiful city in the world, Seattle is no slouch. Want affordability, apparently one can move to Detroit to get that. But I think most people would rather live in one of the west coast cities.
    And compared to SF, LA, SJ, and SD, Seattle is downright affordable!

    http://www.cbc.ca/news/canada/british-columbia/vancouver-s-housing-2nd-least-affordable-in-world-1.2505524

  8. 8
    Blurtman says:

    RE: ess @ 7 – It could indeed get worse here, i.e., less affordable.

  9. 9
    Blurtman says:

    RE: Ira Sacharoff @ 5 – Data?

  10. 10
    Boxkicker says:

    I think the buyer of my house is really anxious….

    In a matter of 14 days, went from listing the property, mutual acceptance of $16K over listing (multiple offers in play), inspection with NOTHING to fix, to pending awaiting close.

  11. 11

    RE: Blurtman @ 8
    Or Soon MASS Exodus to Escape High Rents and Property Taxes?

    Like California?

    http://www.manhattan-institute.org/html/cr_71.htm#.VgQJYzYcRzk

    Check out table 2 and 3…..the mass domestic exodus is replaced with low wage immigrants.

  12. 12
    greg says:

    RE: Boxkicker @ 10

    sounds like a pretty standard deal for todays market…. If you are priced close to market, then expect a few bids, with no terms outside of standard contracts…(agents love no terms it makes the whole thing super easy).

    great time to be a seller, 2 worst buyer market I have ever been in.

  13. 13
    Blurtman says:

    Ready the NIRP bomb. This is not a drill.

  14. 14
    Boxkicker says:

    RE: greg @ 11 – Agreed!!! I transferred out of the area so it is good timing! Definitely was priced right!

  15. 15
    Gabe Sanders says:

    Are homes unaffordable because they are priced too high or because wages have stayed low?

  16. 16
    boater says:

    RE: Gabe Sanders @ 15
    Yes. But probably more the former than the later. Most American jobs are see very little upward wage pressure. A subset, tech, is seeing substantial upward pressure. That subset can afford to raise home prices out of reach of most Americans. Add in US housing as a store of value against devaluing local currencies and you have a hot home market that seems irrational to the average American. Now the question is are prices truly irrational.

    The prices are not irrational from a rent to mortgage perspective. Depending on how you value your time the short commute cab be used to justify higher prices in close to work neighborhoods.

    The foreigner non resident buyer is the odd one. I guess if the goal is just to keep 80% of your money in local currency value it seems like a safe bet.

  17. 17
    Shoeguy says:

    By Gabe Sanders @ 15:

    Are homes unaffordable because they are priced too high or because wages have stayed low?

    A better question would have been “Why have home prices risen so high without an accompanying wage increase, and is this sustainable?”

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