When the housing market officially melted down in 2008 with the collapse of the banking system, there were signs of major weakness that most players in the market ignored. Sure we heard the talk of a housing bubble for over a year, but those of us living and working in Seattle were pretty confident that “it couldn’t happen here…”. How wrong we were!
I was shocked to see homebuilders that had been around for decades get caught in the downdraft and ultimately go out of business. I wondered at that time what flashing red warning lights was everyone missing. It was only after the meltdown that I heard about the “Housing Affordability Index” or HAI, for short, put out by the National Association of Realtors. I immediately wondered why I never heard of this before. To me, this seemed like an excellent early warning system.
What the HAI does is compare the household median income to the median existing single-family home price and computes whether the typical family can qualify for the median priced home, nationally or locally. A score of 100 means that the typical family has just enough income to qualify for the median priced home (assuming a 20% down payment and prevailing mortgage rates). A score above 100 means that the family has income in excess of what's needed to qualify for the mortgage. A score below 100 means that families are stretching beyond their means to buy a home. (These are folks who are in danger of defaulting on their loan at the first unexpected life change; like a job loss, divorce, or uninsured medical emergency**.)
** According to the Kaiser Family Foundation that tracks healthcare issues, 1-in-8 Washington residents are still uninsured.
It may surprise you, but despite the rapid rise in home prices in the Seattle-Tacoma-Bellevue market, our metropolitan region currently has an affordability score of just under 130. That compares favorably to the San Jose-Sunnyvale-Santa Clara score of 64. If there are any parallels to be drawn between these two markets it’s that our home prices are still within in the affordable range. I've included a link to the NAR chart of the HAI in all the metropolitan markets they track. You may want to check in with this index from time to time. Here is a summary of the HAI over the past three years for some regions close to us.
As of January 2016, the median detached single-family home price in King County is $490,000. The median condo price in and around downtown Seattle is $400,000.
Yes, it is painful to see home prices bid up beyond our expectations, but as they say “change is inevitable”. Keep in mind that as interest rate rise, the HAI will fall... unless median income rise at the same rate as interest rates. Mortgage rates are still below 4%, but not for too much longer. You will want to do your personal affordability index before you go out house hunting. Then be ready to expect the unexpected. Your lender can help you with the calculations. I can furnish you with the median home price in the areas you are searching.
Happy Condo Hunting,
Seattle Condo Specialist