Maryland Housing Economics

Anne Arundel County Housing Affordability Index Rises 2.1%

December 10, 2007 - The Anne Arundel County Housing Affordability Index rose 2.1% in November 2007 to 61.1 - up slightly from 59.9 in October 2007.  In November 2007 the Average Sold Price of a home in Anne Arundel County was $415,771 - up from $419,355 in October 2007 as reported by the Metropolitan Regional Information Systems, Inc. ("MRIS", http://www.mris.com/).  Assuming industry accepted qualifying ratios (28%) for conventional 30-year fixed mortgages with an 80% loan-to-value ratio and 6.5% annual interest rate, buyers needed approximately $108,024 in household income to purchase a home in Anne Arundel County last month (See Table 1, below).  Their monthly mortgage payment is estimated at $2,521 (principal, interest, taxes and insurance).

Although it appears that prices remain stable as the year-end approaches, buyer's income has not kept pace with the increase in the cost of housing.  Buyer's that didn't refinance and can use available equity from their home when they sell or had an income windfall sometime this year may be able to keep their mortgages affordable when purchasing more expensive homes.   Everyone else may be out of luck.  This is one explanation why so many homes remain unsold in the Anne Arundel County real estate market.

According to Stephen Howell - an Associate Broker with Coldwell Banker Residential Brokerage in Annapolis, Maryland "Many buyers, who own homes in our area today, couldn't afford to purchase the home they now live in at today's prices.  They might not qualify for the loan.  Banks with their interest only adjustable rate mortgage products enabled buyers to qualify to purchase more home on the lower monthly payment, but those days may be over.  Sellers are going to have to wait until the banks and the buyers figure out what to do.  But sellers who have to sell are going to have to lower their price to get their home sold this winter."

Table 1 - Anne Arundel County Housing Affordability Index

Across Maryland, Harford County was the most affordable location in Maryland in November 2007 with a HAI of 104.5 - and was barely changed from last month.  Talbot County, on the other hand, was the least affordable location in Maryland with a HAI of 33.5 in November of 2007 - down from 37.2 in October 2007.  Across the U.S. as a whole, the National Association of REALTORS^® ("NAR", http://www.realtor.org/) reports the September 2007 (revised) HAI as 115.8, up 8.9% from August when the Index was 106.3.  The cost of the Median Priced Existing Single-Family home reported by NAR is $208,600 - almost half that of the $415,771 Average Sold Price reported by MRIS for Anne Arundel County in November 2007.

Table 2 - November 2007 Maryland Housing Affordability Index

According to Mr. Howell "Very few buyers bring a sizable down payment to the settlement table.  During the last few years adjustable rate interest only mortgages have keep monthly payments inline with buyers' income.  It's not unreasonable to think that some buyers purchasing in Anne Arundel County will have household incomes exceeding one hundred thousand dollars, but, many others will not.  Income has not kept pace with rising home prices and housing affordability has fallen as a result."

Furthermore according to Mr. Howell "The glut of homes on the market may be due in a large part to the inability of buyers to afford a home.  For sellers, when a buyer does make an offer on their home - if they're bringing twenty percent to the table - those buyers are gold plated and should be taken seriously.  They might be first-time home buyers or transfers relocating from out of our area.  Either way, they are serious and looking for deals."

Mr. Howell's sentiments about the market are backed up by the statistics published by MRIS.  According to statistics released today, MRIS reported the Average Sale Prices as a percentage of Average List Price was 90.16% in November 2007 - nearly three percent worse than this time last year when the ratio was reported to be 93.06%.  Sellers were accepting offers that were nearly ten percent less than their asking price on properties going to settlement in November.  In the months leading up to these November settlements, buyers were negotiating excellent deals while sellers continued to hold onto their asking prices.  In the end - at the settlement table - the buyers prevailed.

When the Housing Affordability Index ("HAI") rises, sales prices or interest rates are falling or median income is rising.  When the Index falls, then prices or rates are rising or median income is falling.  As with any mathematical equation, there is a fixed relationship between all the variables.  The HAI is calculated first by computing an estimated mortgage payment amount comprised of principal, interest, taxes and insurance (often referred to as PITI).  The calculation is based on 80% of the Average Sold Prices.  Taxes are estimated at 0.891 per $100 per year of the Average Sold Price.  Insurance is estimated at 0.35% of the Average Sold Price.  A buyer's actual PITI will vary depending on many factors, including their credit score, loan program and the lender the buyer works with.  Once you have computed PITI, divide PITI by 0.28 in order to obtain the income needed to qualify for the mortgage.  Using an estimated 2006 Median Household Income of $66,050 for Anne Arundel County according to the Maryland Department of Planning ("MDP", http://www.mdp.state.md.us/), divide the income needed to qualify to calculate the Index.  The lower the index, the more income buyers must have to qualify for the loan in order to purchase the house.

Mr. Howell operates a Maryland Econometrics website as a public service for use by real estate consumers and other interested parties.  More about the Anne Arundel County Housing Affordability Index and other Maryland counties can be found on the Maryland Econometrics website located at http://www.marylandeconometrics.com/ or by contacting Mr. Stephen Howell at 410-923-3217.

NOTICE:  The information included herein is deemed reliable but not guaranteed. Information and data reported may be revised when updates are available.  The views expressed herein are solely those of the author and do not necessarily reflect the views or policies of, and should not be attributed to, Coldwell Banker Residential Brokerage or NRT Incorporated or any other companies or officials.