Buying a house getting costlier

Affordability index rose in 1st quarter

But low rates might be ending

'04 began with mortgages cheaper, incomes rising

May 09, 2004|By Daniel Taylor | Daniel Taylor,SUN STAFF

Homes became slightly more affordable for most Americans during the first three months of this year as long-term interest rates remained below 6 percent.

But real estate experts said that circumstance is quickly changing as borrowing costs rise and prices remain strong. Mortgage interest rates have inched up during each of the past seven weeks and are at their highest levels since September.

Many prospective homebuyers and real estate experts worry that a double-digit percentage rise in prices in the past two years has put a first-time house out of reach for many, despite the borrowing costs, which hit at least 45-year lows a year ago.

The national affordability index for homeowners improved in the first quarter, according to a report by the National Association of Realtors.

The index shows the nation's typical household had 144.1 percent of the income needed to purchase a median-priced home at $170,800. That is a 5.4 percentage-point jump from the final three months of last year.

For first-time homebuyers, the number was 83.4 percent in the first quarter, up from 79.6 percent in the fourth quarter of last year.

In Maryland, the number rose to 69 percent in February from 67.1 percent in January, the latest figures available.

The Realtors group credited a drop in mortgage interest rates in that quarter and rising family income.

Benchmark 30-year mortgage rates averaged 5.6 percent during the first three months of this year compared with 5.8 percent during the final quarter of last year, according to the Mortgage Bankers Association.

Lawrence Yun, an economist for the National Association of Realtors, said the housing situation has created more worries about affordability because interest rates are expected to rise to as much as 6.5 percent by the end of the year. Thirty-year rates averaged 6.12 percent last week.

"Mortgage rates for the second quarter will be much higher, perhaps as much as half a percentage point," Yun said. "This will definitely cut into affordability."

Gilbert Marsiglia, president of the Maryland Association of Realtors, called affordability in Maryland a "problem."

"House prices are escalating faster than people's income," Marsiglia said. "That's going to bother first-time homebuyers. If the first-time homebuyer can't buy, it could possibly cause a slowdown in the marketplace."

Mortgage rates dropped below 5.5 percent during the first quarter, triggering better-than-expected home sales. But they also fueled sale prices, which rose at least 7.55 percent during each of the first three months of this year.

The median sale price posted its strongest increase in March, rising 19.91 percent to $184,900 compared with the price in March of last year, according to statistics compiled by Metropolitan Regional Information Systems Inc., a Rockville real estate database used by brokers and agents.

"Just take the 5.5 percent [mortgage rate] as a benchmark, and assume that at the end of the year we might be at 7 percent," Marsiglia said. "A $150,000 house multiplied by that extra percent and a half is $2,250 of additional interest, which is $187 more per month."

Tonna Phelps, director of the Maryland Department of Housing and Community Development, the agency that provides low-interest loans to qualified homebuyers, said interest in the program has never been higher.

"Our interest rates are at about 4.95 percent, so I think that's why we're seeing some increased business," Phelps said. "However, I would believe, obviously, that at some point our rates will rise as well."

Yun thinks rising rates could end up helping prospective buyers.

"In the D.C. and Baltimore metro markets, the housing supply has been very thin," he said. "It's been difficult to find homes because of very few listings, so possibly with these rising rates it will bring demand and supply into balance.

"It will remain a seller's market with rates this low, but the frenzied activity will start to taper off."

Prospective buyer Digna Hester, who rents in Mount Washington and is looking to stay in the area, said the higher prices have made it difficult to find something she can afford but that she's hopeful things will change.

"If rates go up, I think prices will go down," the 38-year-old procurement buyer for Procter & Gamble Co. said. "It's got to even out at some point. The market will only bear what we can bear."

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