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Economic trends.


There is a widespread perception that housing affordability is a significant stumbling block to homeownership in the U.S., but there have been few studies that have documented the extent of the problem. For this reason, a new Census Bureau study, Who Can Afford to Buy a House?, by Census Bureau economists Peter J. Fronczek and Howard A. Savage, is an important contribution to the literature.

In it, the authors use detailed data on assets, debt and income in the late 1980s to determine whether families or individuals could qualify for the purchase of a home in their region using conventional or FHA financing. The results are enlightening.

Table 1 shows the factors that would prevent families and individuals from qualifying for the purchase of a median-priced home in their region and a modestly priced home using conventional fixed-rate financing. The median-priced home is the price at which half the homes in the region cost more and half cost less. A modestly priced home is defined as a home priced so that three-fourths of the homes in the region cost more and one-fourth cost less.

Of current owners, about 22.5 million could not qualify for the median-priced home, and of these, around 15.5 million could not qualify for the modestly priced home. These figures partly reflect the fact that many current owners live in homes priced below the modestly priced home, but the numbers also reflect changes in the financial circumstances of current owners since the time they bought their home. For example, they may have been working when they purchased, but now they are retired--a change in life circumstances that may lead to disqualification for insufficient current income.

In the case of the median-priced home, the down payment hurdle is the most significant reason current owners could not qualify--accounting for more than 48 percent of those who could not qualify. This is an impressive share considering that equity in their current home would be available for the down payment, and still would not be enough to get them into the median-priced home. Disqualification on multiple factors was a close second, accounting for 38.5 percent. The numbers are similar for a modestly priced home, with the down payment hurdle accounting for nearly 34 percent of those who could not qualify, and multiple factors accounting for another one-third.

In the case of renters, more than 34 million could not qualify for the median-priced home, while more than 32 million could not afford the modestly priced home. In both cases, the overwhelming majority of renters who could not qualify could not do so for a combination of reasons. In short, it was not a single affordability constraint that would prevent most renters from qualifying, but several affordability constraints involving some combination of insufficient funds for down payments, insufficient income and/or too much debt.

In the late 1980s, though, the FHA program helped mitigate affordability problems significantly. Table 2 shows how many more families and individuals could qualify for home purchases using FHA financing compared to conventional financing. In the case of median-priced homes, more than 2 million more families and unrelated individuals could qualify; in the case of modestly priced homes, the number jumps to nearly 3 million.

The implication is clear. The FHA program provided vital opportunities for homeownership in the late 1980s. Unfortunately, the reforms to the FHA program so far in the 1990s unquestionably reduce opportunities for homeownership. When the Census Bureau updates this study several years from now, and reports affordability using current FHA financing requirements, it will be distressing to see just how significant the reductions in opportunities have been. [Tabular Data 1 to 2 Omitted]

Thomas M. Holloway Senior Economist
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:housing affordability
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Date:Aug 1, 1991
Previous Article:Secondary market.
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