Finding the Most Affordable Housing Markets

If you’re not sweating your monthly mortgage payment and don’t obsessively check mortgage refinancing rates, chances are you live in one of America’s more affordable areas.

Homeowners in Indianapolis know what that’s like.

Its residents don’t have to scrimp and save to afford a home at the median price. There, the bulk of the housing stock is well within reach of the average Indiana mortgage seeker.

Are savings depleted? According to calculations, it would take just two years of gross salary to become a homeowner there.

Cleveland, St Louis and Detroit are also well priced. But affordability isn’t limited to the Midwest.

Pittsburgh, Atlanta and Greensboro, N.C., made Yahoo! Real Estate’s affordable markets list as well.

Affordability is more complex than sinking a third of your take-home pay into real estate. Instead, Yahoo! calculated its rankings by using two measurements and applying them to the nation’s forty biggest metros.

The first is a look at the ratio of median home price to median household salary, which determines how many years of gross salary the median household would have to spend to buy the median house.

In Indianapolis, where the median household income is $60,383, it would take just under two years of gross salary to buy.

That must sound pretty nice to the residents of Los Angeles, where the median household income is $58,319, but housing is more than five times more expensive than in Indianapolis.

When you calculate that out, it’s 20 years more of mortgage payments. There has never been anything like the difference in housing affordability that exists today.

The second measure tracks the percentage of homes sold in the first quarter of this year that were affordable to the median income-earning household.

The metric shows what’s at play in an area like the San Diego housing market. The city might be in the midst of a price slump, but that doesn’t necessarily mean it has become significantly more affordable.

Only 9 percent of San Diego homes sold in the first quarter of 2007 were within the reach of the median income-earning household, according to the National Association of Home Builders and the Wells Fargo index, which assumes a 10 percent down payment and a market-rate home loan.

Economists say this indicates the top of the market is moving, but the middle and bottom strata of the potential mortgage seekers are having problems.

In a market where housing is that unaffordable, buyers have to rely more heavily on credit. Potential future foreclosures can throw a market into stall - not a great sign for recovery.

“Affordable markets are in a better position for a strong recovery, because more buyers can come in once prices fall,” says Mark Zandi, chief economist at Moody’s Economy.com. “In markets that rely more on credit, any recovery will be more muted if lending standards remain tight or tighten.”

Compare those same staggering San Diego mortgage numbers to those of the country’s most affordable areas.

Almost 90 percent of Indianapolis sales in the first quarter of this year were affordable to the median income-earning household. In Cincinnati, the number was 78 percent and in Cleveland, 82 percent.

Other areas on the list, such as Dallas and Atlanta, are actually experiencing heavy growth, yet are still affordable as Georgia and Texas home loan costs remain low.

Price-to-income affordability in Dallas was seventh best overall, and just under 70 percent of homes sold in the Atlanta housing market in the first quarter of this year were available to the median income-earning household.

Prices can remain affordable in fast-growing cities when there are high rates of new-home construction and relaxed growth restrictions. High demand doesn’t necessarily impede affordability either.

Examine the difference between Boston and Raleigh, N.C. ; since 2000, Boston has experienced steady emigration, while Raleigh, has welcomed new residents.

• But during that time, Boston home prices increased by 16.7 percent, and median income-earning Massachusetts mortgage applicants can only afford about half of what they could seven years ago.
• In Raleigh, home prices have grown by 37 percent, but the share of median income earners who can afford homes has only dropped by 3 percent, all while the city underwent a population boom.

What gives? A high increase in new-home construction and growth policies not overburdened by regulation acted as price reliefs in Raleigh.

Boston doesn’t have such policies and hasn’t seen a great deal of new construction. Both Raleigh and Charlotte, just missed making the list, landing at Nos. 12 and 13, respectively.

“There are so many people moving [to Charlotte] now that everyone and their brother is a real estate agent,” says Francine Dupont, a broker with Dupont Real Estate in Charlotte.

“A lot of people are cashing in on their northeastern properties and moving down here because you can get so much more for your money.”

SOURCE: Yahoo! Real Estate