This analysis attempts to compare the relative accessibility of homeownership for renters in the 85 largest metro areas by estimating the number of renters in each metro whose incomes enable them to afford monthly payments on the median priced home under a set of assumptions. Affordability calculations use median metro area home prices, 30-year mortgage interest rates, and property tax and insurance costs, as well as renter household incomes and assumptions for other non-housing debt obligations as a percent of income and a 5% downpayment such as is common for FHA first time homebuyer purchase loans. As a threshold for affordability, this calculation also uses the new Qualified Mortgage rule’s 43% total debt-to-income threshold to determine whether the median priced home in that metro area was affordable to individual renter households.
As a result of the 2010 Dodd-Frank financial regulations, new Qualified Mortgage (QM) rules went into effect January of 2014. Though the majority of the mortgage market remains exempt from QM as GSE or other government-backed mortgages do not yet have to comply with these regulations, some banks have already begun using these guidelines even for GSE-eligible loans. Furthermore, these regulations set a standard for ability to pay that can be readily applied to an analysis like this one. In order for a non-exempt loan to be in compliance with the ability-to-repay requirement, the total debt-to-income ratio cannot exceed 43 percent. Debt payments in this ratio include the principal and interest on the mortgage and any other outstanding loan on the property, monthly payments for taxes and insurance as required by the lender, and all other non-housing debt payments being made by the borrower. In this analysis, a potential buyer was considered able to afford to purchase a home if these total payments did not exceed 43 percent.
Analysis was performed on the top 100 metros by population for which National Association of Realtors® quarterly median existing single-family home price data was available, resulting in 85 metros included in the final analysis. We used an average of quarterly, non-seasonally adjusted NAR house prices for 2013 for each metro area. To calculate the monthly mortgage payment, we assumed a 30-year, fixed-rate mortgage at 3.98 percent, the 2013 annual average interest rate from the Primary Mortgage Market Survey, with a downpayment of 5 percent. Since we were evaluating the number of potential buyers in a market, many of whom would be first-time buyers, we used this lower, more conservative, downpayment amount. Using a 20 percent downpayment shifts the share of households who can afford the median home upwards, as it results in lower monthly payments, but does not change the trend or substantially alter which metros are more affordable than others.
The estimate of non-housing debt comes from the Survey of Consumer Finances. Of households who have non-housing debt, the average debt-to-income ratio was 8 percent. For the median household in 2012, this translates to around $340 per month in non-housing debt payments, which include car loans, credit cards, and student loans, among other types of debt. Though the ratio for all households is lower, as it includes households who do not have non-housing debt, we applied this average of 8 percent in order to be more conservative in our estimates of how many households can afford the median home in their area.
To estimate household incomes and tax and insurance rates, we used the 2012 American Community Survey (ACS) Public Use Microdata Sample. Using information from the Missouri Census Data Center, we used 2010 Census population counts to estimate the proportion of the population within a Public Use Microdata Area (PUMA) that belonged to each metro area. These shares were used to reweight the 2010 PUMAs so that they would reflect the population distributions of 2013 metro and micropolitan statistical areas. Using the metro-weighted data, we were able to calculate the approximate tax and insurance rates for each metro. Owner households report the amount they pay annually in taxes and insurance and their estimates of their house values. We calculated the percent of home value paid annually in taxes and insurance for each household and then used the mean for each metro in our analysis. The amount of taxes paid is reported as a range (for example, “$100-$149”); we used the median number in that range in order to estimate the tax payment as a share of home value. These tax and insurance rates were then applied to the median priced home, according to NAR, for each metro area.
Finally, we used reported household incomes in conjunction with our estimates of monthly mortgage payments and taxes and insurance on the median home to calculate the debt-to-income ratio for all households in the survey. Accounting for the estimated 8 percent debt-to-income ratio for non-housing debt payments, payments related to mortgage principal and interest, taxes, and insurance could not consume more than 35 percent of a household’s income before being considered unaffordable. These counts of households, split by owners and renters, were used to calculate the share of renters who could afford to buy the median home in each metro.
| Assumption |
Number |
Source |
| Affordability Threshold |
43% Debt-to-income ratio |
Qualified Mortgage Ability-to-Repay maximum debt-to-income threshold |
| Mortgage terms |
30-year, fixed-rate |
Most common mortgage terms |
| Interest Rate |
3.98% |
2013 annual average interest rate from Freddie Mac's Primary Mortgage Market Survey |
| Downpayment Amount |
5% |
Reflects a downpayment amount more likely of first-time buyers |
| Home Price |
$83,775 - $773,375 |
Median for each metro from 2013 annual average of quarterly NAR Existing Single-Family Median Home Price |
| Non-housing Debt |
8% Debt-to-income |
Average debt to income ratio of households with non-housing debt, from JCHS tabulations of Survey of Consumer Finances |
| Tax Payments |
0.37% - 2.86% |
Average rate for each metro applied to median home price from JCHS tabulations of 2012 American Community Survey adjusted for metro calculations |
| Insurance Payments |
0.21% - 0.94% |
Average rate for each metro applied to median home price from JCHS tabulations of 2012 American Community Survey adjusted for metro calculations |
| Incomes |
Household income, as reported |
JCHS tabulations of 2012 American Community Survey adjusted for metro calculations. |