Housing Affordability Increases in July as Home Price Growth Slows

At the national level, housing affordability slightly inclined in July compared to the previous month according to NAR's Housing Affordability Index. Compared to the prior month, affordability improved as the monthly mortgage payment fell by 2.2% while the median family income rose by 2.3%.

Compared to one year ago, affordability declined in July as the median family income rose by 2.3% while the monthly mortgage payment increased 16.1%. The effective 30-year fixed mortgage rate¹ was 2.92% this July compared to 3.08% one year ago, but the median existing home sales price rose 18.6% from one year ago.

As of July 2021, the national and regional indices were all above 100, meaning that a family with the median income had more than the income required to afford a median-priced home. The income required to afford a mortgage, or the qualifying income, is the income needed so that mortgage payments account for 25% of family income.² The most affordable region was the Midwest, with an index value of 195.3 (median family income of $87,197 with the qualifying income of $44,640). The least affordable region remained the West, where the index was 114.9 (median family income of $95,007 and the qualifying income of $82,656). The South was the second most affordable region with an index of 159.6 (median family income of $80,720 and the qualifying income of $50,592). The Northeast was the second most unaffordable region with an index of 148.8 (median family income of $99,954 with a qualifying income of $67,152).

Housing affordability³ declined from a year ago in all four regions. The Northeast had the biggest decline of 16.8%. The South region experienced a weakening in price growth compared to a year ago of 9.5% followed by the Midwest with a dip of 7.9%. The West had the smallest decrease of 6.9%.

Affordability is up in all four regions from last month. The South had the biggest gain of 3.7% followed by the Midwest which rose 2.8%. The Northeast region increased 2.1% followed the West region with the smallest incline of 1.7%.

Nationally, mortgage rates were down 16 basis points from one year ago (one percentage point equals 100 basis points).

Compared to one year ago, the monthly mortgage payment rose to $1,225 from $1,055, an increase of 16.6%. The annual mortgage payment as a percentage of income inclined to 16.6% this July from 14.6% a year ago due to higher home prices and only modest gains in median family incomes. Regionally, the West has the highest mortgage payment to income share at 22.7% of income. The Northeast had the second highest share at 16.8% followed by the South with their share at 15.7%. The Midwest had the lowest mortgage payment as a percentage of income at 12.8%. Mortgage payments are not burdensome if they are no more than 25% of income.⁴

Since March 2021, mortgage rates have continued to taper and that has helped borrowers lock in lower mortgage payments. Qualifying incomes are lower, so more potential homeowners have a chance to enter the housing market. With families having children going back to school, the search for a new home will slow. With fewer lock boxes being opened, first-time home buyers will have less competition during the fall season.

This week, The Mortgage Bankers Association reported a decline of 1.9% in mortgage applications from a week ago. Mortgage credit availability increased 0.3% in July which means credit standards were relaxing modestly.

What does housing affordability look like in your market? View the full data release.

The Housing Affordability Index calculation assumes a 20% down payment and a 25% qualifying ratio (principal and interest payment to income). See further details on the methodology and assumptions behind the calculation.

¹ Starting in May 2019, FHFA discontinued the release of several mortgage rates and only published an adjustable rate mortgage called PMMS+ based on Freddie Mac Primary Mortgage Market Survey. With these changes, NAR discontinued the release of the HAI Composite Index (based on 30-year fixed-rate and ARM) and starting in May 2019 only releases the HAI based on a 30-year mortgage. NAR calculates the 30-year effective fixed rate based on Freddie Mac's 30-year fixed mortgage contract rate, 30-year fixed mortgage points and fees, and a median loan value based on the NAR median price and a 20% down payment.

² The 25% mortgage payment to income share takes into consideration that a homeowner has other expenses such as property insurance, taxes, utilities, and maintenance, so that total housing expenses are no more than 30% of income. Housing costs are not burdensome if they account for no more than 30% of income.

³ A Home Affordability Index (HAI) value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index of 120 signifies that a family earning the median income has 20% more than the level of income needed pay the mortgage on a median-priced home, assuming a 20% down payment so that the monthly payment and interest will not exceed 25% of this level of income (qualifying income).

⁴ Total housing costs that include mortgage payment, property taxes, maintenance, insurance, utilities are not considered burdensome of they account for no more than 30% of income.

⁵ The Mortgage Bankers Association (MBA) that analyzes data from Ellie Mae's AllRegs® Market Clarity® business information tool. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit.