WASHINGTON -- Spurred by lower interest rates, housing has been more affordable during the last six months than it's been since the mid-1970s, according to the National Association of Realtors' composite and first-time homebuyer Housing Affordability Indexes released last week.
`With interest rates at a level not seen in almost two decades, it's no wonder we are seeing increased home sales," said Dorcas T. Helfant, president of the association.
"Despite the affordable financing available, however, first-time buyers still need incentives to overcome down payment barriers," she said. "Our figures show that the disparity between trade-up and first-time buyers is getting worse, not better.`
The association's composite Housing Affordability Index, which measures affordability of resale homes for all buyers, measured 122.4 for the first quarter of 1992 -- 34.8 percentage points higher than the 87.6 index for first-time buyers. The gap between the two indexes was 31.7 percentage points during the first quarter of 1991.
The composite and first-time homebuyer affordability indexes rose during the first quarter of 1992 from a year ago because lower interest rates and improving income offset higher house prices. The average effective interest rate for the first quarter was 8.36 percent. Interest rates have not been lower since dipping to 8.06 percent in the third quarter of 1973.
The association's composite Housing Affordability Index shows the ability of a family earning the median income to buy a median-priced resale home. For the first quarter of 1992, the composite index rose more than 10 points to 122.4, compared with 111.9 a year ago.
Similarly, the first-time buyer index rose more than seven points to 87.6, compared with 80.2 a year ago. While housing is becoming more affordable for the first-time buyer, the improvement is at a slower rate than for the typical buyer.
When the association's Housing Affordability Index measures 100, the median family income equals exactly the amount needed to buy a median-priced house, using conventional financing and a 20 percent down payment. Because the national median income during the first quarter exceeded the qualifying income, a family earning the median income could buy a house priced at $126,200 -- $23,100 higher than the median price for the first quarter.
Since the median is the midpoint, the composite index shows that half the families in the nation earned more than $36,788 per year and half earned less. It shows that those families had 122.4 percent of the income needed to qualify to buy a house with a median price of $103,100.
In the last six months, the composite index has been at its highest level since 1976, when it averaged 125.8. The association's first-time homebuyer affordability index rose to 87.6, the highest level since 1977.
That index shows the ability of renters to qualify for a mortgage on a starter home. When it equals 100, the typical first-time buyer can afford the typical starter house under existing financial conditions. The first-time buyer median income represents the typical income of a renter family with wage earners ages 25 to 44.
During the first quarter of 1992, the median income of prime first-time homebuyers was $25,752. Yet the qualifying income needed for conventional financing covering 90 percent of a $87,600 median starter home price was $29,394 -- a difference of $3,642 per year. Based on the first quarter's entry-level affordability conditions, a typical first-time buyer would qualify to buy a home priced at about $76,700. That's $10,900 higher than a year ago.
The change in first-time buyer purchasing power over the last year resulted from a modest increase in the price of starter houses, a slight increase in family income and a drop in interest rates. Factoring in closing costs, interest rates for first-time buyers fell 1.4 percentage points to 8.61 percent from a year ago, when the rate was 10.01 percent.
Association Chief Economist John A. Tuccillo said that, despite lower interest rates, first-time homebuyers remain at a disadvantage because they must save enough money for a down payment and closing costs.