Key takeaways: ×

See below exactly how much salary you would need to earn in order to afford the principal, interest, taxes and insurance payments on a median-priced home in the 50 most populous metropolitan areas.

Key takeaways:

Home prices rising more strongly are starting to overwhelm the beneficial effects of lower mortgage rates, and affordability is beginning to tighten up again after some recent improvement.

As has been the case, lower mortgage rates in the first quarter compared to both year-ago and quarter-ago levels have been a consistent offset to surging prices, but this effect is fading. By way of comparison, our last report found a year-over-year decline in mortgage rates of 1.05%, helping affordability even though home prices had risen by an aggregate 5.67% across the 50 markets we track. For this quarter, the differential in rates versus last year for most markets was 0.79%, but the same aggregate measure of home prices showed an increase of 7.35%

The result of this is that in the last quarter (4Q19), just one metro area saw a year-over-year increase in the salary needed to buy a median priced home. For the first quarter of this year? That number has grown to 17, and as we are now in the time of year when home prices often record their strongest quarterly gains that number is likely to grow. Even with mortgage rates driven down further by a combination of Federal Reserve policy, a collapse in economic activity and disappearing inflation, the differential in rates from last year to now is currently less than this quarter's current 0.79% gap, while home prices seem to be still gaining momentum.

How can home prices still be rising even as economic calamity seems all around us, some 33 million have lost their employment and there are millions of homeowners in mortgage payment forbearance plans? Simple. Even with significant issues in selling or buying a home during COVID-19 restrictions (some starting to ease) there continues to be considerably more demand for houses than supply.

In his comments that accompanied the release of the latest home price data we utilize in our calculations, NAR Chief Economist Lawrence Yun noted "The first quarter price jumps mostly reflect conditions prior to the coronavirus outbreak and show the strength of the housing demand prior to the pandemic." However, he added "Even now, due to very limited listings, home prices are showing no signs of buckling."

At the moment, and of our group, prices are rising the fastest in smaller metro areas compared to larger ones. Of the 13 metros with double-digit price gains none had a population rank higher than 11 (Phoenix). Places such as Indianapolis, Milwaukee, Birmingham, Memphis, Salt Lake City and Austin are likely seeing continued migration of folks from pricier locales looking for communities that fit their needs and still have affordable housing.

The NAR reported that at the end of last quarter, 1.5 million existing homes were available for sale, 10.2% lower than total inventory at the end of 2019’s first quarter. As of March 2020, housing inventory totals were equivalent to 3.4 months at the current sales pace and remain a long distance from the six months of supply which is considered healthy and optimal. "Supply is extremely limited, and there are simply not as many homes for sale to meet the demand among potential buyers," Yun said. "More supply and more listings are needed to provide a faster recovery for the economy."

As we're now about halfway though the second quarter and months along in the COVID-19 pandemic there is some data to suggest activity levels more recent than the first quarter of 2020. The Realtors' own Pending Home Sales Index dropped by almost 21% in March as shutdowns expanded across the country, and job losses since then suggest that some percentage of additional deals probably fell apart after initial contract paperwork was signed. While April data covering sales of both new and existing homes isn't due until later this month, the 8.5% decline in existing and 15.4% decline in new home sales in March seems likely to be repeated (or worse) when the new data come into view.

Of course, the open question is whether even a significant drop off in buyer demand will be greater than the decline in seller supply, and if the combination of the two will be sufficient to curtail outsized price gains and help improve affordability again. We'll know soon enough.

Of course, the other factor that is an offset to rising costs is increased income. Before the employment-crushing pandemic, wages were rising about 3% per year in the aggregate. Economic contraction and falling productivity among remaining workers mean that wage gains will likely be hard to come by for a time as we move forward. April's 4.7% gain in average hourly earnings was distorted by COVID-19 job losses; some 40% of those in households making less than $40,000 a year had lost a job in March, according to the Federal Reserve Survey of Household Economic and Decisionmaking. April may have similar distortion, but don't be fooled; incomes are likely to be less supportive of helping home affordability than has been the case.

Changing and even tightening mortgage standards in place -- not from Fannie/Freddie or other government-backed organizations, but rather from private markets, and from lenders imposing overlays to protect themselves against future losses -- may also serve to temper demand in the months ahead. We'll of course know more about these effects and what's happening with home sales and affordability and mortgage availability in the next quarter and beyond. Given the loss of savings and salary, some potential homebuyers may need to consider an FHA-backed mortgage or other low-down payment mortgage alternatives.

A couple of housekeeping notes related to the data for this quarter: The Pittsburgh metro area median home price data provided by RealStats is preliminary and subject to later revision. For Los Angeles, the increase in conforming loan limits for 2020 to $510,400 means that (for the first quarter at least) a borrower in the metro area could use a lower-cost conforming loan if they made a 20% down payment. Coupled with a lower quarterly home price, this combination created an outsized decline in the quarter-to-quarter salary comparison.

Potential homebuyers of more modest means looking to buy homes often struggle to come up with even a minimum downpayment and closing costs, especially in heated markets. Help making the jump to homeownership is often available but is tricky to find if you don't know where to look. To help wanna-be homebuyers, HSH offers its database of Homebuyer Assistance Programs by state, where information about these valuable programs, vital website addresses, contact info and more can be found.