Just like last month, we now have the lowest mortgage rates since the ‘50s, so rate affordability won’t get much better than now. The market has been adjusting over the past several months to end of the homebuyer tax credit. While the price distribution of sales shifted upward the past couple months (because there were fewer sales in the lower price ranges), prices now appear to be falling because sales at lower prices have started to ramp up again. Market inventory turnover is slow and the median list price is falling, so actual sales prices should be falling.

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. These 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 some of these were financial products 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 4.23%, a record low reflecting current Federal Reserve policies and investment in US Treasuries as a safe haven. The September median closed sale price fell about 10% from August to $242,183 and is now about 3% lower than it was a year ago. There were more sales of low priced properties as the market has recovered from the distortions of the homebuyer tax credit. For our calculations here, the variations in median price makes affordability seem like it is changing even though we think the price picture has remained fairly constant.

The affordability index was 1.26 in October, much improved from the 1.12 in August and September and back where it was earlier in the year. First time buyer affordability also improved significantly to .84 after remaining  steady at .74 in August and September.  Mortgage insurance quotes are dependent on credit scores - MI for a FICO credit score of 700 might be $20 per month higher than MI for a credit score of 750 (we use 750 and have corrected all PMI values to be consistent with this). Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability over the past year.

October's APR is 4.433% on a 30-Year and 3.943% on a 15-Year, both conforming. September's APR was 4.559% on a 30-Year and 4.069% on a 15-Year, both conforming. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County. These higher limits have helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.012% on one major bank web site - same as last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.