Consumer house-buying power—how much one can buy based on household income and the 30-year, fixed mortgage rate—is up 55 percent since 2006. So writes Mark Fleming, Chief Economist at First American, in a blog looking at the concept of housing affordability through the eyes of renters.
According to Fleming, “a renter’s house-buying power is based on the median renter’s income, the prevailing 30-year, fixed mortgage-rate, and assumes a 5 percent down payment, and that one-third of their pre-tax income is used for the mortgage. The renter’s house-buying power can then be used to see what share of the homes for sale the renter could afford to buy.”
Extrapolating that approach to the national housing market, Fleming compared the current buying power of the median renter to that of the median renter in 2000. Back then, he said, the median renter0 had an income of $40,750, which translated into $163,232 of house-buying power.
In practical terms, it meant that the median renter of 2000 could afford to buy 57 percent of the homes on the market. By 2006, though, spikes in living expenses, from petroleum and utilities to climbing housing prices, chipped the potential to buy down to 38 percent of available homes for the median renter, Fleming wrote.
Six more years later, in 2012, following a housing collapse that left thousands of properties on the market for lower prices, the median renter's $254,000 in buying power meant that that renter could afford 68 percent of homes on the market nationally. That's the highest rate First American has ever tracked.
By 2017, the median renter could afford to buy 64 percent of all the homes sold, Fleming wrote.
“Additionally, over the last three years, renter house-buying power has increased fast enough to keep pace with house price appreciation, so the share of homes that a renter can afford to buy has remained the same since 2015,” he wrote.
So despite sometimes gloomy looks into affordability—which industry insiders frequently say is suffering under the weight of escalating prices and tight inventory—the big picture as Fleming paints it is more optimistic.
“Although mortgage rates are expected to rise, they are still low by historic standards, and real household incomes are the highest they have ever been,” he wrote. “Assuming this trend continues, our measure of affordability, which takes into account income, interest rates, and house prices, indicates that homeownership is still within reach for renters.”