by Scott Richter and Dr. Patrick Jones
After recovering from the housing bubble pop of the mid-2000s, the housing market has been on a relatively positive trajectory since. Home values had decreased so it made more sense for those who wanted to sell before the crash but could perhaps hold-on, waiting for better times to do so. During these dark days, it seems everyone from banks to families were waiting for better times to sell.
Purchasers, in contrast, were forming a long line to buy. Prices were low, so it was the time to buy, but no one was selling. It’s as if everyone wanted to get home, but the same traffic jam was making it impossible.
Then almost as if instantly, the script was flipped. Prices increased yet the market remained strong because demand was so high. Three indicators on Walla Walla Trends show this in detail for Walla Walla County with the state as a benchmark:
- Indicator 5.1.1: Median Home Resale Price
- Indicator 5.1.2: Housing Affordability Index (HAI) for All-Homebuyers
- Indicator 5.1.3: Housing Affordability Index (HAI) for First-Time Homebuyers
All are sourced by the Washington Center for Real Estate Research (WCRER) at the University of Washington.
Once the new housing market emerged, some homeowners waiting to sell probably wondered if it might be wise to wait a year or two to sell maybe increasing profits greatly. Potential homebuyers were now thrust into a seller’s market, and perhaps rising values and new mortgage lending laws and buyer requirements leaving some to no longer qualify as they were priced-out of the market by home values growing at a much greater pace than wages.
This article focuses on the First-Time Homebuyers Housing Affordability Index (HAI), but can be used in comparison to the All-Homebuyers HAI. The two HAI measures are similar but vary slightly.
The First-Time Homebuyers HAI measures the ability of a household to purchase their first home. It assumes the household has an income at 70% of the area median, the home value at 85% of the area median, the purchaser puts 10% down on a 30-year fixed mortgage. The First-Time Homebuyers HAI adds 0.25% to the mortgage rate for mortgage insurance.
The All-Homebuyers HAI assumes a median household income of an area, a median priced home, 20% paid down on a 30-year fixed mortgage. Mortgage insurance is not factored into the All-Homebuyer HAI.
According to WCRER, the mortgage rate used is the “average of the Freddie Mac 30-year fixed mortgage interest rate for the quarter.”
Additionally, “In all cases it is assumed the lender would be willing to fund the loan so long as the principal and interest payments do not exceed 25 percent of gross income”, according to WCRER.
For both HAI measures, a 100.0 value can be considered the same as a household spending all, or 100.0%, of the 24.99% of household income allowed to be spent on principal and interest and still have housing considered affordable.
Looking at Indicator 5.1.3: Housing Affordability Index for First-Time Homebuyers, on Walla Walla Trends, we see for the average household in Walla Walla looking to purchase their first home, housing has not been considered affordable at any time during this series. While the same can be said about the state, housing is slightly more affordable for first-time homebuyers in Walla Walla County.
During the third quarter of 2020, the First-Time Homebuyers HAI value was 88.3 compared to 79.7 across the state. In other words, the typical household looking to purchase their first home in Walla Walla County had 88.3% of income required, compared to those in Washington State having 79.7% of income required for costs to be considered affordable.
Over the course of this relatively short series, the county value has dropped by 3.9 points while the state has increased by 3.8 points. However, all data points for the county are higher than the state, reflecting consistently more affordable housing in the county.
For perspective, the other HAI measurement on Walla Walla Trends, Indicator 5.1.2: Housing Affordability Index for All Homebuyers has a similar trendline to first-time homebuyers, yet the values are higher.
During the third quarter of 2020 in Walla Walla County, the All-Homebuyers HAI value was 120.6, or households in Walla Walla County had 120.6% of the income required to purchase a home for housing to be considered affordable without exceeding 25% of total gross household income. Washington State, while still affordable, had an All-Homebuyers HAI value of 108.9, or the typical household in the state had 108.9% of the income required to purchase a home for housing to be considered affordable.
This comparison shows while all-homebuyers had more stringent mortgage terms (higher down, higher incomes) than first-time homebuyers, both groups of homebuyers in Walla Walla County will find their next purchase to be more affordable than their counterparts across the state.
While some indicators on Walla Walla Trends are likely to be negatively affected by COVID-19, such as the leading causes of both hospitalizations and deaths, or the share of K-12 students meeting or exceeding standardized test standards. Through the third quarter of 2020, both HAI indicators are improving. Housing affordability for first-time homebuyers and all-homebuyers is increasing in both the county and state. One might not immediately think a housing market can still boom during a global pandemic and major economic downturn, if not recession.
Yet mortgage rates have been at record lows multiple times this year and those who could afford purchasing a home pre-pandemic likely still could throughout – especially in Walla Walla County with one of the lowest unemployment rates in the state throughout the pandemic.
In other words, homes are more affordable in Walla Walla County than in the state overall, and affordability is increasing. This, while Indicator 5.1.1: Median Home Resale Value has also continued to grow with each quarter during 2020 increasing over the previous quarter.
We will have to wait and see if the current trends in these three indicators continue through the fourth quarter of 2020 and into 2021.