We now have the lowest mortgage rates since the '50s, so rate affordability won't get much better than now; however, the price distribution of homes sold has changed, and as a result the median price has gone up and overall affordability has gone down. This is a structural change that makes the numbers in this report inconsistent, but probably doesn't represent an actual rise in prices across our market. Market inventory is rising, so prices should be going down.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. We've recently updated the income and 1st time buyer assumptions for this comparison to conform with current methods at WCRER. These updated data and calculations show not only that affordability has suffered because median household incomes have fallen the past few years, but also that affordability has not yet returned to where it was at turn of the century. Note that these calculations only compare the affordability of standard conventional loans. During the era of zero down subprime lending, other products with adjustable interest rates, interest only, or option ARM loans were used to qualify buyers for higher loans. History has shown that many of these were ultimately unaffordable. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 10% down on a house priced at 85% of the median and obtains a 30 year fixed rate mortgage with mortgage insurance. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2001, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2010 are estimates using the latest monthly data for median prices, interest rates, and median income.

 The interest rate for a typical 30 year fixed rate conforming loan has fallen to about 4.50%, a record low reflecting investment in US Treasuries as a safe haven. The July median closed sale price rose about 10% from June to $264,250. This big jump in median price represents a shift in the distribution of buyers rather than a rise in overall prices. There were fewer buyers of low priced properties because many had purchased earlier this year to take advantage of the homebuyer tax credit. For our calculations here, the rise in median price makes affordability worse even though we don't think real prices have risen. Rates have been expected to rise at some point in the coming year, with some experts predicting they'll reach 6% by the end of 2010. However, fear of a European sovereign default and other signs of continued economic weakness appear to be resulting in a longer period of low US Treasury and mortgage rates. The inconsistency in the median price as the price distribution changes makes the information in this report less meaningful. It's important to understand that this same phenomena also affects the regional and national statistics being reported in by the news media.

The affordability index worsened to 1.12 in August from 1.23 in July. First time buyer affordability also worsened to .71 from .82 in July.  First time buyer affordability went down not only because of the median price rose, but also because the cost of mortgage insurance appears to have risen significantly. We use an automatic PMI calculator at a public web site. The first time buyer PMI for this month was about double what it has been in recent months. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2004	2005	2006	2007	2008	2009	2010
Annual Average interest rate	5.84	5.87	6.41	6.34	5.80	5.03	4.50
Median Income	$54467	$58464	$61786	$60,668	$59135	$57724	$57724
Median Price	$206900	$250000	$275000	$290343	$265000	$244499	$264250
Monthly payment	$975	$1182	$1378	$1443	$1244	$1054	$1071
Affordable payment	$1135	$1218	$1287	$1264	$1232	$1203	$1203
Affordability Index	1.16	1.03	0.93	0.88	0.99	1.14	1.12
1st time buyer payment	$1002	$1214	$1408	$1478	$1277	$1089	$1182
1st time buyer affordable payment	$794	$853	$901	$885	$862	$842	$842
1st time buyer affordability index	0.79	0.70	0.64	0.60	0.68	0.77	0.71