March is rapidly coming to an end, and we still want to report on the affordability numbers. Going into the new month there’s still lots of controversy about our economy and the near term for our real estate market. Let us try to focus only on two (of a nearly infinite number of) aspects:

The new issue of The Economist proclaims “Hope at Last” and tells a story of a reviving and changing (for the better) United States.

America has relied for decades on its consumers’ willingness to spend, borne up by borrowing and the false comfort of bubbles in asset prices. Now Americans are saving more and borrowing less because the collapse in home prices has eviscerated their wealth. Bankers and regulators who once celebrated the democratisation of credit now ration it. Businesses from General Electric to Citigroup that prospered from the consumption culture are rethinking—and often shrinking—their loan books. Property developers are building smaller, simpler houses. The country’s geography is changing. Recession has slowed the rush to sun and sprawl. People are moving out of Florida and into North Dakota. Foreclosures and costlier commutes have laid low the distant suburbs, or exurbs.

On the other hand, Northwest Economist Bill Conerly tells why the latest of many attempts to help homeowners stay in their homes won’t work, titled “Mortgage Modifications Will Not Solve the Housing Problem.”

Both rental and owned vacancy rates are too high, well above historic norms.  If we keep some families in their owned property, they don't have to move to rentals.  If we offer a first-time home-buyers tax credit, we can move some families out of rentals into owned housing.  But we cannot do any more than push the peas around on the plate.

He also mentions what will solve the housing problem.

What will help?  The standard old answer is population growth.  More people means more demand for housing.  We simply built ahead of our needs and now are waiting for our needs to catch up.

Second, an improving job market will help some young adults move out of their parents' homes, and others will be able to afford to live without roommates.  That will stimulate the demand for housing units in total, and some of that demand will spread over into the owned housing market.

The February median price for Kitsap real estate ($252,435) is up about 5% from January’s low. The Federal Reserve is winding down purchases of mortgage backed securities and debt from Fannie Mae and Freddie Mac, operations which have helped to hold down mortgage interest rates and promote a fragile real estate market.  Mortgage interest rates have so far not moved much in response. As we predicted last month, the median price has moved back up to about where it was for most of last year after dipping at year end when sales were very weak. Thus the affordability numbers this month, though worse than last month, are still at about the low range of where they were over the past year.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. Note that unlike the discussion above these calculations only compare the affordability of standard conventional loans, not the different types of loan products that have been offered. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 20% down on a house priced at 80% of the median and obtains a 30 year fixed rate mortgage. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2003, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2010 are estimates using the latest monthly data for median prices and interest rates (2009 has been updated with average annual values), and an estimated median family income for 2008-2010.

With interest rates remaining nearly level at 5.12% in March (same as last month) for a typical 30 year fixed rate conforming loan and the median price rising about 5% in February to $252,435, affordability has dropped from near all time high last month back into the range we saw for most of last year. The outlook for rates is that they will continue to rise in the coming year, with some experts predicting they'll reach 6% by the end of 2010. Keeping in mind how median prices can be deceptive, you should be aware that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges. The affordability index fell to 1.23 in February from 1.39 in December, almost entirely due to the higher median price. First time buyer affordability fell to 1.08 from 1.21 last month. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

March's APR is 5.318% on a 30-Year and 4.573% on a 15-Year, both conforming. February's rates were 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. The conventional and FHA loan limits remain at $475,000 in Kitsap County, which has helped sales of higher priced homes. The VA loan lender imposed limit is back to $417,000. The homebuyer tax credit was reworked last year to give some incentive to move up buyers as well as first time buyers.  A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.643% on one major bank web site - lower than last month. You should also check with local credit unions and savings and loans for jumbo loan rates. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.