26 AugHow Affordable is Housing in Colorado?

Photo by Michael Buck on Flickr

How do you determine whether you can afford something?  Typically this is an individual or family decision based on your personal budget, funds available and your goals.  When I think of whether I can afford something I am normally thinking about a smaller purchase or subscription like a TV, internet or a vacation.  What about housing though?  How do we determine if we can afford a house?

The National Association of Home Builders (NAHB) and Wells Fargo joined forces to determine the affordability of housing in the Unites States. They call is the Housing Opportunity Index.  NAHB and Wells Fargo explain the Housing Opportunity Index:

the share of homes sold in that area that would have been affordable to a family earning the local median income based on standard mortgage underwriting criteria. Therefore, there are really two major components – income and housing cost.

Income

The income used for this calculation is based on the HUD’s Median Family Income.  On May 20, 2010 we shared the 2010 Median Family Income for the purpose of explaining the changes to the income limits on first time home buyer programs.  The same median income was used in this study to determine affordability of housing.  Here are a few areas you might be interested in:

Housing

Housing prices was the other factor in determining affordability which was based on sold home data provided by CoreLogic.  The NAHB receives sales data from CoreLogic each month including information on state, county, date of sale, and sales price of homes sold.  Here are the median home prices of homes sold in the areas above:

Calculating Affordability

Now that we have the median income and median sales prices in these areas of Colorado we can calculate the affordability.

NAHB assumes that a family can afford to spend 28 percent of its gross income on housing

The monthly principal and interest that an owner would pay is based on the assumption of a 30 year fixed rate mortgage, with a loan for 90 percent of the sales price (i.e., 10 percent downpayment).  The interest rate is a weighted average of fixed and adjustable rates during that quarter, as reported by the Federal Housing Finance Board.  In addition to principal and interest, cost also includes estimated property taxes and property insurance for that home.  This is based on metropolitan estimates of tax and insurance rates from the 2000 Decennial Census, as estimated by NAHB from the Census Bureau’s Public Use Microdata Sample (PUMS).  Mortgage insurance is not currently a component of the HOI.

Based on these calculations NAHB & Wells Fargo determined what percentage of the homes were considered affordable based on the Median Income which produced these results:

Understanding the Affordability

National Ranking is broken up by Metropolitan Statistical Areas or Metropolitan Divisions.  For the study there were 225 areas calculated for affordability.  This means that Nationally Colorado is not very affordable.  For the 6 areas of Colorado included in the study only one, Pueblo, was in the top half.

Regional Areas divided the United States into 4 areas:

• Northeast
• Midwest
• South
• West

Colorado was included in the West region.  The West region had a total of 68 areas.  Looking within our region, Colorado was quite affordable with all areas except Boulder in the top half of affordability in the West.

The National Affordability stands at 72.3% which puts Denver, 72.2% affordable, almost exactly at the same level of Affordability as the Nation as a whole.

The History of Affordability

Another piece of information I found interesting is just how affordable housing is right now.  Check out the data from past studies:

Housing has become increasingly affordable since Q2 2006 since this study was started.  Only 40.57% of the homes sold in that quarter were affordable compared to 2nd quarter 2010 where 72.3% were affordable.  What a great time time to buy!

About the Author | Scott & Marla Wynn

Scott & Marla Wynn are mortgage lenders with a focus on education. We believe an educated customer is our best customer. The mortgage industry has complicated the process of obtaining a mortgage so much that most customers believe the best way to select a mortgage lender is to inquire about rates and fees. Although rates and fees are an important part of the mortgage process, there are much more important areas to be concerned with. Lending A Hand was created to pass along our experience, knowledge and research to YOU to allow you to become a more educated mortgage customer. If you are planning a home purchase or refinance and live in the state of Colorado, we hope you select the Wynn Team as your mortgage lender!