It is nearly impossible for first-time homebuyers to afford a home in the country's most expensive cities, as mortgage affordability just goes from bad to worse, according to Realtor.com.
The Realtor association released their first Mortgage Affordability Report after analyzing data from 25 largest housing markets in America. The association chose to publish it in time for the spring housing season.
The Realtor computed for the mortgage-to-income ratio using median income in 2014 and the local going rate for a 30-year fixed-rate mortgage that time. For reference, the target ratio for affordability is 28%, but all cities belonging in the top 5 least affordable started from 40.7% at least!
The least affordable U.S. city is the San Francisco area. Runners-up to San Francisco in unaffordability are San Diego, Los Angeles, New York City, and Miami.
Least Affordable Cities of 2014
1. San Francisco-Oakland-Hayward, CA:
Bad to Worse Part: Its Mortgage-to-Income Ratio (2014) is 64.7% but is predicted to rise to 72.0%
2. San Diego including Carlsbad, CA:
Bad to Worse Part: Its Mortgage-to-Income Ratio (2014) is 53.0% but is predicted to rise to 56.9%
3. Los Angeles-Long Beach-Anaheim, CA
Bad to Worse Part: Its Mortgage-to-Income Ratio (2014) is 48.5% but is predicted to rise to 50.7%
4. New York-Newark-Jersey City, NY-NJ-PA
Bad to Worse Part: Its Mortgage-to-Income Ratio (2014) is 44.2% but is predicted to rise to 46.6%
5. Miami-Fort Lauderdale-W. Palm Beach, FL
Bad to Worse Part: Its Mortgage-to-Income Ratio (2014) is 40.7% but is predicted to rise to 42.2%
The Realtor also released the most affordable cities based on mortgage-to-income ratio, using 30-year-fixed rate.
Most Affordable Cities of 2014
1. Detroit-Warren-Dearborn, MI
Its Mortgage-to-Income Ratio (2014) is 12.4% but is predicted to rise to 13.2%.
2. St. Louis, MO-IL
Its Mortgage-to-Income Ratio (2014) is 17.5% but is predicted to rise to 18.1%.
3. Cleveland-Elyria, OH
Its Mortgage-to-Income Ratio (2014) is 17.8% but is predicted to rise to 18.8%.
4. Atlanta-Sandy Springs-Roswell, GA
Its Mortgage-to-Income Ratio (2014) is 18.9% but is predicted to rise to 19.8%.
5. Pittsburgh, PA
Its Mortgage-to-Income Ratio (2014) is 19.1% but is predicted to rise to 20.1%.
From the data the Realtor had released, one could see the very large gap of affordability between the expensive areas and the affordable ones.
"Over the last 10 years, we have seen marketplace gyrations ranging from bubble to burst to recovery to stabilization, and we are now seeing a market of extremes on the affordability front," Jonathan Smoke, chief economist for realtor.com® said.
With these data, buyers could then be more aware of the trends in the market and could be a lot wiser to choose what's best for them. "Buyers-especially first-time home buyers-might feel more motivated as the overall market continues to improve, and this report provides potential buyers with local insight that is both informative and instructive, " Smoke added.
Along with the mortgage-to-income ratio data, the rent-to income ratio data were also released in the same report by realtor. From the data, San Francisco has the highest forecasted rent-to-income ratio (2015) of 40.9%.
The association said people should aim to get out of this situation. Their goal should be to stop renting and start having houses of their own. In New York's case, AMNewYork noted that rent eats up almost 60% of its citizens' average income.
The bad news here is that these renters will still spend most of their earnings just to pay their rent, with only slight deviations of -2.0% to 0.3% in the predicted rent-to-income rent ratio, as seen in the study.
This means the rise in income is just negligible to create a big change in the ratio, like for San Francisco, from 41.7% it is predicted to be 40.9%, that's only a -0.8% change! Meaning, even with higher income, one may not even feel any change at all.
Business Insider also reported that San Francisco is officially the most expensive rental market citing data from Zumper. Curbed added that the median rent reported for a one-bedroom apartment was $3,460 per month.
"Renting is not an affordability strategy," said Smoke. "In many of these markets, the equivalent rent is actually higher, which limits ability to save for an eventual down payment."
