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LendingTree analysis reveals where homebuyers are stretching to buy.

Byline: Staff Report

LendingTree has released astudyon where homebuyers are stretching the most to buy a home.

A well-known rule of thumb says that the home price should not exceed three times the buyer's annual income. When a mortgage is used to buy a house, the ratio of amount borrowed to income is the extent to which a borrower is leveraged. This study compares leverage ratios across cities to see where borrowers are stretching the most to purchase a home.

The study used Home Mortgage Disclosure Act (HMDA) data that includes over 7 million mortgages originated in 2017 to calculate the leverage rate of borrowers in the 50 largest cities in America. The median amount borrowed was divided by the median borrower income for all purchases in the HMDA database for 2017.

"Home prices continue to reach new highs, with the most recent data showing prices for existing homes at a median of$276,900in June; new homes are even more expensive at a median of$302,100," said Tendayi Kapfidze, Chief Economist and report author. "The annual increase in home prices has been outpacing income growth since 2012. As a result, homebuyers have been stretching more and more to purchase their dream homes. Low interest rates have masked this to some extent, as they have subdued the monthly payment, but the recent increase in interest has reduced this mitigating factor."

Kapfidze continued, "Historical data shows that nationally leverage ratios increased from 2.30 in 2014 to 2.56 in 2017 as home prices rose faster than incomes. To rank the cities, we calculated leverage ratios that show how the median homebuyer in each city fared. However, each borrower is unique, and their homebuying capacity depends on additional factors including credit scores, other debt currently held and down payment."

Key findings

Californiais known for its high home prices and high incomes. Unfortunately, the tech boom is not enriching everyone with cash, and 6 of the top 10 cities are in the Golden State, including the top four (Los Angeles,San Diego,San Francisco, andSan Jose).

Los Angelesleads the way for stretched buyers, with the median homebuyer with a mortgage borrowing 3.75 times their annual income.

San Diegohas similar income toLos Angeles, but cheaper homes give it the second highest leverage ratio of 3.62.

Home prices are much higher in the Bay Area cities which rank 3 and 4 for stretched borrowers, but higher incomes provide some relief and leverage ratios are 3.52 and 3.50 forSan FranciscoandSan Jose.

The more affordable cities are clustered in the Rust Belt and southern U.S. states.PittsburghandClevelandhave the lowest leverage ratios at just 2.00 times annual income.

Houstonis the largest city in the bottom 10 and has the highest loan amounts of the affordable cities. High incomes driven by the energy and health care sectors helps it to a benign leverage ratio of 2.17.

The Most Stretched Homebuyers in America

#1Los Angeles

Leverage ratio: 3.75

Median mortgage amount:$461,000

Median borrower income:$123,000

#2San Diego

Leverage ratio: 3.62

Median mortgage amount:$442,000

Median borrower income:$122,000

#3San Francisco

Leverage ratio: 3.52

Median mortgage amount:$845,000

Median borrower income:$240,000

The Least Stretched Homebuyers in America

#48Buffalo, N.Y.

Leverage ratio: 2.03

Median mortgage amount:$136,000

Median borrower income:$67,000


Leverage ratio: 2.00

Median mortgage amount:$152,000

Median borrower income:$76,000


Leverage ratio: 2.00

Median mortgage amount:$142,000

Median borrower income:$71,000

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Publication:The Mecklenburg Times (Charlotte, NC)
Geographic Code:1U9CA
Date:Dec 14, 2018
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