a home for sale signWhen I first became interested in real estate, rates were right around 7%(-ish). And every time rates appeared to be creeping up, my Dad would holler, "Back in the day, rates were 14% -- and people still bought houses right and left! People have to have a place to live, no matter what rates are like."

While that's true "back in the day," homes routinely went for $40,000 or $75,000. These days, the median home price is around $177,000 and in my neck of the woods, the median is upwards of $600,000. Seven percent of that is vastly higher and much more prohibitive to home ownership, than 14% of $40,000.Last quarter, though, interest rates dipped below -- gasp 5%! As rates dropped to their lowest levels, ever, and prices were also at or near bottom in the minds of most industry insiders, the affordability of owning a home in America crept to near-historic highs for the seventh quarter in a row, according to the Housing Opportunity Index (HOI), released yesterday by the National Association of Home Builders (NAHB) and Wells Fargo.

"With interest rates remaining at historically low levels, and house prices starting to stabilize, home ownership is within reach of more households than it has been for almost 20 years," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich.

The HOI, which takes into account each city's home prices and interest rates, hit a record high of 72.5% of American homes being affordable to someone earning the national median income in the first quarter of 2009. The most recent HOI indicates that 72.1% of homes were affordable to households at the national median income of $64,400, but this is the seventh consecutive quarter in which the HOI was greater than 70%. And that's saying something, considering that the HOI seldom reached 65%, and never hit 70%!

Wanna-be home buyers in Indianapolis were the biggest winners, as the Indianapolis-Carmel, Indiana metro area ranked as the most affordable major housing market in America; over 93% of homes in that market are affordable (Affordability is defined as a mortgage payment less than 28% of the household's gross income, assuming a 10% down payment at the average interest rate for both fixed and affordable rate loans over last quarter.) In fact, Midwestern markets occupied most of the top spots on the affordability list for larger real estate markets, with Youngstown-Warren-Boardman, Ohio-Pennsylvania; Grand Rapids-Wyoming, Michigan; Dayton, Ohio and Wichita, Kansas rounding out the list of the top 5 most affordable major metros.

Not surprisingly, the New York City metro ranked as the least affordable market in which to own a home, as only 22.6% of the homes sold last quarter in the New York area (which also encompasses White Plains and Wayne, New Jersey) were affordable to families earning the national median income. Traditionally high-cost-of-living areas -- mostly in California -- occupied the next few spots on the not-so-affordable end of the HOI's spectrum: San Francisco; Bridgeport-Stamford-Norwalk, Conn.; Los Angeles-Long Beach-Glendale, Calif.; and Santa Ana-Anaheim-Irvine, Calif. completed the list of the five least affordable housing markets for the third quarter of 2010.

In light of the sky-high numbers of unemployed and underemployed Americans, it has become easy to suppose that the job market and declines in income are behind the slow pace of home sales. Homes could be dirt cheap and interest rates could be zero, but if no one was making any money, they would still not be affordable! The Housing Opportunity Index accounts for the state of the job market, though, by virtue of benchmarking prices and interest rates against the current (and currently falling) median household income; even with median incomes having been ravaged by unemployment and underemployment, homes are still near their most affordable in the 20 years this Index has been published.

What the HOI and no other data has yet been able to track, though, are two other job market impacts on the housing market. First, there are many well-employed Americans out there who feel uncertain about the long-term security of their jobs, and are unwilling to make the long-term financial commitment to a mortgage, as a result. And, second, the job market has changed so that many Americans, especially Gen-Yers, feel that maintaining geographic mobility (i.e., the ability to move if and when their job moves) is an important career advantage. With home prices so unstable in so many areas, people are hesitant to buy unless they can feel comfortable to committing to owning the place for seven to 10 years -- and that's a long time, especially for someone at the beginning of their career who wants the freedom to move where the jobs are.

So, we're left with a chicken-or-egg dilemma: without job market stability, many Americans won't buy homes. But others would buy if the housing market was more stable and they could count on being able to sell and break even in a slightly shorter time frame.

Fortunately, this one won't take as much time to resolve as the real chicken/egg conundrum; when jobs come, people will buy. Jobs will empower more Americans to qualify for home loans, and will help other Americans who are being held back out of job insecurity to feel confident that they would be able to find an appropriate job in their town, even if their current company or position moved elsewhere. Long story short: when the job market recovers, so will the housing market.

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