Philly Slips A Notch on the Affordability Scale

The area remains the most affordable in the Northeast by a fairly comfortable margin. But it fell from 12th to 13th most affordable in a quarterly survey of 27 large U.S. metros.

Philly's still the most affordable large housing market in the Northeast, but it got a little bit less so in the second quarter of 2016.

The good news: you can still afford to buy a home in Philadelphia if you’re a middle-income earner. The bad news: It got just a little bit harder to do so in the second quarter of 2016.

According to the latest quarterly survey of housing affordability conducted by mortgage search site, a local household needs to make $53,421.87 a year before taxes in order to afford the mortgage on a median-priced home in the 11-county Philadelphia Metropolitan Statistical Area.*

That’s about $3,000 per year less than is required to afford the mortgage on a median-priced home in Baltimore, and well below the metropolitan median household income of $62,171 in 2014, the latest year for which Census Bureau figures are available.

But it’s also $4,000 a year more than was required in the first quarter of 2016, thanks to a 13.88 percent jump in home prices from the previous quarter. The rise caused Philadelphia to trade places with Houston on HSH’s 27-city mortgage affordability study, dropping it to the 13th most affordable of the 27 cities.

The annual income figure assumes the buyer has good to excellent credit, a “front-end” debt ratio of 28 percent and a 20 percent down payment towards the purchase price, with a traditional 30-year fixed-rate mortgage covering the rest; the mortgage payment in turn covers principal, interest, property taxes and insurance if required. Cut the down payment in half, to 10 percent, and the income figure rises substantially, to $61,343, thanks to higher interest rates and the need to purchase private mortgage insurance. But note that even that figure remains below the areawide median household income, something that can’t be said for most of the other large cities in the Northeast.

Relative to area medians, however, residents of second-most-affordable-in-the-Northeast Baltimore (No. 15 nationwide) can afford homes even more easily. The annual income figures of $56,837.35 and $65,859 with 10 percent down are both well below the 2014 area median household income of $71,501. Washingtonians’ high household incomes ($91,193 in 2014) also mean they can afford the more expensive homes there with a 20 percent down payment ($81,940 annual income required), but not with a 10 percent one. New Yorkers and Bostonians earning the area median income are out of luck, though.

The quarterly drop in affordability is due entirely to house price increases, for mortgage rates in the Philadelphia area fell by 0.16 percent, mirroring national mortgage rate trends.

Compared to year-ago figures, though, the increase in house prices in Philadelphia was exceedingly modest: only 0.22 percent, one of the smallest annual increases on the HSH survey.

HSH Vice President Keith Gumbinger attributes the large difference in quarterly vs. annual price changes to the mix of houses on the market. “One of the things the realtor data don’t tell us” — HSH derives its median sale price figures from National Association of Realtors data — “are what the mix of homes are that sell in a given quarter.

“It may be due to the summer selling season, when more homes come on the market, or it may be because of a shift in sales from smaller homes and condominiums to larger suburban homes.”

The drop in mortgage rates, he said, was a double-edged sword: Lower rates mean lower total monthly payments for identically priced homes, but lower rates “also tend to spark demand and cause prices to rise further.”

The decreasing affordability of housing in many metros, he said, is due to a simple fact: “House prices have shown strong gains, but incomes have lagged behind.”

Philadelphia’s ace in the affordability hole, he noted, was the widespread availability of lower-priced housing outside of the relatively expensive city core and the ritzy Main Line. This, he said, also means that the drop in affordability from the first quarter to the second doesn’t mean home buyers of modest means will be shut out of the market. “This is the median figure, which means half the homes sold for less,” he said. “This means there’s still opportunity in the more affordable range. But it also means the competition for these homes is very severe.”

*The 11 counties that make up the area are: In Pennsylvania, Bucks, Chester, Delaware, Montgomery and Philadelphia; in New Jersey, Burlington, Camden, Gloucester and Salem; in Delaware, New Castle; in Maryland, Cecil.

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