Affordability falling as rates rise

by Ryan Smith20 Dec 2013
Rising mortgage rates are challenging housing affordability as the year draws to a close, according to data released Thursday by Freddie Mac.

While more than 70% of the country remained affordable in the third quarter, affordability was down to just 36% in the West, according to Freddie. But that was at an average 4.4% interest rate. At a 5% rate – a distinct likelihood given the recent taper – only 63% of the country would remain affordable. If rates hit 7%, affordability would drop to only 35%, according to Freddie.

Freddie Mac vice president and chief economist Frank Nothaft also blamed rising home prices and the employment outlook for the decline in affordability.

“While most housing markets still remain affordable, rising mortgage rates and rising house prices over the past six months are making it more challenging for the typical family to purchase a home without stretching beyond their means, especially in the Northeast and along the Pacific Coast,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “Like most, we expect mortgage rates to rise over the coming year, so it's critical we start to see more job gains and income growth in the coming year. This will help to keep payment-to-income ratios in balance -- an important factor not only for first-time buyers but for sustaining homeownership levels among existing owners.”

But another hit to housing affordability is coming from Freddie itself, along with sister agency Fannie Mae. The Federal Housing Finance Agency, which oversees the companies, announced this month that both would raise their guarantee fees by an average of 11 basis points.

Acting FHFA head Edward DeMarco characterized the increase as “better protection of and return to the taxpayers” – but the higher fees represent a price hike that’s sure to be passed on to borrowers, according to Marc Savitt, president of the National Association of Independent Housing Professionals.

“They’re going to say these g-fees are what the lender pays. But the lender passes those costs on to the consumer,” Savitt said. “It ends up on the backs of the consumers, and DeMarco knows that. Why do we keep going after home ownership? The housing market is what brought the economy down, so if we’re starting to recover, why would we jeopardize that recovery? Every time you raise the prices, you knock more customers out of eligibility.”


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