This article announces NAHB’s “priced out estimates” for 2020, showing how higher home prices and interest rates affect housing affordability. The 2020 US estimates indicate that a $1,000 increase in the median new home price ($344,6521) would price 158,857 U. S. households out of the market. In other words, 158,857 households would qualify for the new home mortgage before the change, but not afterwards. More households are priced out this way in 2020 than were in 2019, because lower interest rates combined with relatively strong income growth have put the median-priced new within range of more households, so there are more of them to price out.
Other NAHB estimates for 2020 show that 25 basis points added to the mortgage rate at 30-year fixed rate of 3.75% would price out around 1.3 million households. In addition to the national numbers, NAHB once again is providing priced out estimates for individual states and more than 300 metropolitan areas.
NAHB priced-out model uses the ability to qualify a mortgage to measure housing affordability, because most home buyers finance their new home purchase with conventional loans, and because convenient underwriting standards for these loans exist. The standard NAHB adopts for its priced-out estimates is that the sum of the mortgage payment (including the principal amount, loan interest, property tax, homeowners’ property and private mortgage insurance premiums (PITI), is no more than 28 percent of monthly gross household income.
As a result, the number of households that qualify for mortgages for a certain priced home depends on the household income distribution in an area and the mortgage interest rate at that time. The most recent detailed household income distributions for all states and metro areas are from the 2018 American Community Survey (ACS). NAHB adjusts the income distributions to reflect the income and population changes that may happen from 2018 to 2020. The income distribution is adjusted for inflation using the 2019 median family income at the state2 and metro3 levels, and then extrapolated it into 2020. The number of households in 2020 is projected by the growth rate of households from 2017 to 2018.
Other assumptions of the priced-out calculation include a 10% down payment, and a 30-year fixed rate mortgage at an interest rate of 3.75% with zero points. For a loan with this down payment, private mortgage insurance is required by lenders and thus included as part of PITI. The typical private mortgage insurance annual premium is 73 basis points4, based on the standard assumption of national median credit score of 7385 and 10% down payment and 30-year fixed mortgage rate. Effective local property tax rates are calculated using data from the 2018 American Community Survey (ACS) summary files. Homeowner’s insurance rates are constructed from the 2016 ACS Public Use Microdata Sample (PUMS)6. For the US as a whole, the property tax is $11 per $1,000 of property value and the homeowner insurance is $4 per $1,000 property value.
Under these assumptions, 44.0 million (about 35%) of the 124.5 million US households could afford to buy a new median priced home at $345,908 in 2020. A $1,000 home price increase thus will price 158,857 households out of the market for this home. These are the households that can qualify for a mortgage before a $1,000 increase but not afterwards, as shown in Table 1 below.
The number of priced out households varies across both states and metropolitan areas, largely affected by the sizes of local population and the affordability of new homes. Among all the states, Texas registered the largest number of households priced out of the market by a $1,000 increase in the median-priced home in the state (14,143), followed by Florida (10,274), and California (8,870). See chart for estimates of priced out households in South Carolina and its major cities. SCBJ