2012 will probably go down as the most affordable year on record for homebuyers, according to the National Association of Realtors. A combination of depressed home prices and rock-bottom interest rates created perfect-storm home buying conditions that Americans may not see again for decades, experts say.
NAR's Housing Affordability Index hit 1982 in November 2012, and the trade group projects the index to average 194 for all of 2012. An index of only 100 indicates a level of affordability where a median-income household has exactly enough income to qualify for a mortgage, assuming the loan requires a 20 percent down payment and an annual mortgage payment equal to 25 percent of annual income.
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The housing market reached record levels of affordability even as home prices began to rise. But rapidly rising rental rates and record-low mortgage interest rates more than offset the erosion to affordability caused by price gains, according to Jed Kolko, chief economist at Trulia. The listing service, which measures home affordability based on rental rates instead of income, recently found that buying a home in the summer of 2012 was 45 percent cheaper than renting in the 100 largest metros.
The party is almost over, however, experts say. Home prices are finally beginning to rise faster than rental rates, chipping away at affordability, Kolko said. In addition, most industry observers believe that mortgage interest rates will bottom out and begin to appreciate in 2013.
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Nonetheless, home prices are still likely to remain far below their housing-boom peaks. The NAR projects that its affordability index will average 160 in 2013. The record levels of affordability recorded over the past few years mask a major roadblock that has prevented many potential buyers from taking advantage of low housing costs.
"Although 2012 was highest on record, the excessively tight underwriting precluded many would-be homebuyers from locking-in generational low interest rates," said Lawrence Yun, chief economist at NAR. However, as lenders iron out settlements over faulty practices and regulatory agencies finalize mortgage rules, credit could loosen up, according to experts. And that would allow many more consumers to capitalize on what is expected to still be a highly affordable housing market, they say.
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