Home prices continue to reach new highs, with the most recent data showing prices for existing homes at a median of $276,900 in June; new homes are even more expensive at a median of $302,100. 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.
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. In this study, we compared leverage ratios across cities to see where borrowers are stretching the most to purchase a home.
They 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.
This means that the time spent commuting is a major consideration on where to relocate and purchase the next home, the longer the commuting time - potentially, the less desirable a city or neighborhood becomes.
- California is 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, and San Jose).
- Los Angeles leads the way for stretched buyers, with the median homebuyer with a mortgage borrowing 3.75 times their annual income.
- San Diego has similar income to Los 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 for San Francisco and San Jose.
- The more affordable cities are clustered in the Rust Belt and southern U.S. states. Pittsburgh and Cleveland have the lowest leverage ratios at just 2.00 times annual income.
- Houston is 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.
Source: LendingTree Study
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 4.50 MBS) lost -23 basis points (BPS) from last Friday's close which caused fixed mortgage rates to move higher for the week. It was the second straight week of higher rates with MBS selling off a total of -39 basis points over the past two weeks.
Overview: We had very strong economic data all week with big readings in Manufacturing (1/3 of our economy0 and Services (2/3 of our economy) and then ended the week with higher wage growth with the Year-over-year Average Hourly Earnings hitting 2.9%.
Jobs, Jobs, Jobs:
Non Farm Payrolls:
August was better than expected, 201K vs est of 191K.
July was revised lower from 157K down to 147K
June was revised lower from 248K down to 208K
The three month rolling average is now 185K
The Average Hourly Earnings YOY rose by 2.9% vs est of 2.7%
Earnings on a MOM basis rose by 0.4% vs est of 0.2%.
Average Hourly Wages are now $27.16
The Unemployment Rate was unchanged at 3.9%
The Participation Rate dropped from 62.9% down to 62.7%
Services: The ISM Non-Manufacturing (2/3 of our economy) was very strong and beat out forecasts with a 58.5 vs 56.8 estimate.
Manufacturing: The August ISM Manufacturing Index jumped to 61.3 vs est of 57.7. Its the best reading since January. Any reading above 60 is rare for this report and very robust. ISM Prices Paid
hit 72.1 vs est of 70.2...a very lofty level and yet another report that shows pricing pressures (inflation).
The Talking Fed: NY Fed Pres John Williams (voting member) said that steady inflation and low unemployment have created an economy that is “as good as it gets” for the U.S. but that “we can continue to be relatively patient and allow this economy to continue to grow.”