General housing affordability conditions fell during the third quarter, a result of higher home prices, but remained favorable, according to the National Association of Realtors.

NAR’s composite Housing Affordability Index was 128.6 during the third quarter of 2004, down 3.7 percentage points from 132.3 in the second quarter; it was 7.6 points below the same period a year earlier when it stood at 136.2.

David Lereah, NAR’s chief economist, said current market conditions are keeping the door to home ownership open. “Any index reading over 100 is considered sufficient for the nation as a whole and we remain in pretty good shape,” he said.

The 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 third-quarter median family income was projected to be $54,761. The index shows the nation’s typical household could afford to buy a home costing $242,400, well above the national median existing-home price in the third quarter, which was $188,500.

“When you look at the monthly costs of housing, the typical family who bought a median-priced home last quarter is spending only 19.4 percent of their income for mortgage principal and interest, which is well within lender guidelines. If you look back to the early 1980s, monthly costs were as high as 36 percent and in the early 1990s they were over 20 percent, so in historic terms housing affordability is healthy,” said Lereah. The NAR index assumes a buyer should spend no more than 25 percent of monthly income for mortgage principal and interest.

NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., said some of the findings are seasonal. “The third quarter traditionally has a higher ratio of more expensive homes being sold to families with children,” he said. “With a steady decline in mortgage interest rates, the affordability index is likely to improve in the fourth quarter.”

According to the Federal Housing Finance Board, the average effective mortgage interest rate for loans closed on existing homes was 5.82 percent during the third quarter, up from 5.73 percent in the second quarter; the rate was 5.66 percent in the third quarter of 2003. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

Affordability for first-time home buyers also was lower in the third quarter, down 2.4 percentage points to 74.7 from a reading of 77.1 in the second quarter; the index was 6.3 points below the third quarter 2003 index.

The association’s First-Time Homebuyer Affordability Index shows a typical first-time-buyer household, aged 25 to 44, with an income of $31,225, had 74.7 percent of the income needed to purchase a typical starter home with a 10 percent down payment. The median starter home price was $160,200 during the third quarter.

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The index shows the typical first-time buyer could afford a home costing $119,700. However, many buyers are making smaller down payments than assumed by the index, and are using loans that give them more buying power.

“It’s important to note the first-time-buyer index has never reached 100 in the history of the series, which dates to 1977,” McDonald said. “Ironically, four out of 10 homes are purchased by entry-level buyers. They consult with real estate professionals about loan programs targeted to first-time buyers and about the resources to help them find a starter home that meets their needs.”

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