Housing Affordability Index 2Q11

Rising Median Home Prices Affect Affordability

There were two really great pieces of information for the housing market in Loudoun County during the second quarter of 2011: interest rates were at a remarkably low level, 4.95 percent, and the median sales price increased 11 percent from the first quarter.  The graph below tracks both prevailing mortgage rates (as provided by the NAHB/Wells Fargo Housing Affordability Index) and median sales prices by quarter in Loudoun County.

Over the last 30 quarters since the first quarter of 2004, the mortgage rate was below 5 percent in only 4 quarters – as it turns out, the last four quarters.  This is one of the two largest factors affecting the share of Loudoun households that can afford the median priced home.

The second major factor is the median sales price itself; the lower it is, the more households can afford to live here.  However, after the free fall in prices in recent years, it is refreshing to see that the median jumped significantly in the second quarter.  In fact, the median sales price reached its highest level since the fourth quarter of 2007.  That is good for sellers but does not bode well for buyers searching for affordability.

There are other factors that figure into how affordable an area is – specifically, household income, homeowner’s insurance, homeowner’s association fees, and property taxes.  Assuming that monthly mortgage bills in addition to these other costs amount to 29 percent (or less) of homeowner’s monthly income, 59 percent of Loudoun County households could afford the median priced home in the second quarter of 2011.  For the last eight consecutive quarters, the housing affordability index has exceeded 59 percent.  Compare that to the second quarter of 2006, at the height of an overheated housing market, when only 15 percent of Loudoun households could afford the median priced home.

Household income has steadily risen over the last five years.  Loudoun regularly ranks among the top 3 counties in the country for median household income.  While mortgage rates and median home prices were declining, the median household income rose every year since 2006 (from $98,483 to $114,204 in 2010).  Homeowner’s insurance rates have declined from an average of $55 in 2006 to $49 in 2011.  These factors push affordability up.

Downward pressure came from homeowner association dues that climbed, on average, from $69 per month in Loudoun to $83 (+20 percent).   Real property tax rates also increased, from $.89 per $100 of assessed value in 2006 to $1.285 in 2011.  Neither of these factors were enough to negatively affect affordability though.

This two-year trend suggests that the Loudoun market has stabilized.  And, the Federal Reserve has as much as guaranteed that mortgage rates will remain low through 2012.  However, if home prices continue to advance, as it looks like they will, affordability will be sacrificed.

Developed by Rosemary deButts, Realtor, the Housing Affordability Index (HAI) is defined as the share of families in Loudoun County that could afford the median priced home.  To determine the quarterly Index, calculations are made using annual American Community Survey household income figures, quarterly mortgage interest rates from the NAHB/Wells Fargo HAI, quarterly median sales prices from MRIS, and established housing costs (including county real property tax rates, homeowner’s insurance and HOA fees).  This analysis assumes buyers use conventional financing with 20 percent down and no mortgage insurance.

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