A seasonal decline in home prices and rising family income led to improved housing affordability in the fourth quarter of 2003, according to the National Association of Realtors.

NAR’s composite housing affordability index was 139.2 during the quarter, up 2.6 percentage points from 136.6 reported in the third quarter. The index was 1.1 points below the same period a year earlier when it stood at 140.3.

The index shows the nation’s typical household had 139.2 percent of the income needed to purchase a home at the fourth-quarter median existing-home price, which was $171,600. This index measures affordability factors for all home buyers making a 20 percent down payment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home. The fourth-quarter median family income was projected to be $53,996.

David Lereah, NAR’s chief economist, said the seasonal decline in the median home price results from a normal shift in the market.

“There’s usually a higher ratio of singles and childless couples purchasing in the fourth quarter, and they generally buy more moderately priced homes,” he said. “This means fourth-quarter median prices experience a seasonal dip from the third quarter. Even so, the median price is 6.6 percent higher than the fourth quarter of 2002 and the buying power is strong because the typical family could afford a home costing $238,900 – well above the median price.”

NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., said affordability conditions are projected to remain favorable this year.

“Although mortgage interest rates are expected to rise, particularly in the second half of the year, general affordability conditions should be favorable in most of the country throughout 2004,” he said. “The rate of home-price appreciation is expected to slow to about 4.6 percent this year, while disposable income should rise about 4.6 percent and offset most of the effects of rising mortgage interest rates.”

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 5.83 percent during the fourth quarter, up from 5.66 percent in the third quarter; it was 6.11 percent in the fourth quarter of 2002. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a true bottom-line mortgage cost.

Affordability for first-time home buyers also improved, rising in the fourth quarter to 79.9 from a reading of 78.6 in the third quarter; it was 1.5 points below the fourth quarter 2002 index.

The association’s first-time home buyer affordability index shows a typical first-time buyer household, aged 25 to 44, with an income of $30,436, had 80 percent of the income needed to purchase a typical starter home with a 10 percent down payment. The median starter home price was $145,900 during the fourth quarter.

“The index shows the typical first-time buyer could afford a home costing $116,600, which is below the median price in most metropolitan areas,” McDonald said. “The interesting thing is first-time buyers account for four out of 10 transactions, so they’re finding ways to do it – either with a small starter house, a condo, or some kind of sharing arrangement.”

The National Association of Realtors is a trade association with 972,000 members.

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