Can You Still Afford the American Dream?

Source: Thinkstock

Source: Thinkstock

While interest rates remain low on a historical basis, home affordability continues to be a closely monitored component of the housing market. A sharp rebound in home prices over the past couple years and a sluggish labor environment have kept some buyers on the sidelines. However, the golden rule of real estate still applies to the current market.

We’ve all heard it before — location, location, location. This mantra from real estate agents everywhere is certainly playing out across the country. According to a new report from RealtyTrac, one-third of the almost 1,200 counties analyzed nationwide have surpassed their historical averages for income-to-price affordability percentages since 2000 — making them less affordable now than they have been on average over the past fourteen years.

“The good news is that none of the nearly 1,200 counties we analyzed for the second quarter has regressed to the dangerously low affordability levels reached during the housing price bubble,” explains Daren Blomquist, vice president at RealtyTrac. “But the scales are beginning to tip away from the extremely favorable affordability climate we’ve seen over the last two years, with one-third of the counties analyzed — representing 19 percent of the total population in those counties — now less affordable than their long-term averages. Still, 81 percent of the U.S. population lives in markets where the percentage of income needed to purchase a median-priced home is at or below its long-term average.”

The report calculates both the percentage of median income needed to make monthly payments on a median-priced home in each county in May 2014 as well as the historical trend in each county’s income-to-price affordability percentage going back to January 2000. In an effort to judge how rising interest would affect affordability in the future, the report also calculates the percentage of median income needed to make payments on a median-priced home if rates rise by up to a full percentage point.

Counties less affordable than their long-term averages include San Francisco County, California, Multnomah County, Oregon, Travis County, Texas, and Fulton County, Georgia. Counties that are considered to be inherently unaffordable include Nantucket County, Massachusetts, Pitkin County, Colorado, Los Angeles County, California, and four of the five boroughs in New York City.

If interest rates rise half-a-percentage point, 515 counties with a combined population of 87 million will exceed their historical average for income-to-price affordability percentage, and thirty-nine counties with a population of 3.6 million will exceed their historical peaks for income-to-price affordability percentage. If interest rates rise one full percentage point, 630 counties with a population of 120 million will exceed their historical averages for income-to-price affordability percentages, and fifty-nine counties with a combined population of 4.7 million will exceed their historical peaks for income-to-price affordability percentage.

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