Home Affordability Hits Low in Last Quarter of 2005

Anyone who is looking at buying right now will not be surprised by the following: Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae.

Affordability has almost always been a problem for low-income buyers. However, as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. In fact, in some markets people who already own a home are finding it tough to trade up.

We don't yet know whether this trend will continue for 2006. Given that interest rate hikes are expected to stop sometime this year, it's possible that the housing market will level out at the current price levels, and we'll be seeing challenges to enter the market for some time to come. If the market "softens" as some economists are now saying, we may see some improvements in affordability. But, as always, there is no guarantee.

After all, if we knew exactly what the markets were going to do, we'd all be millionaires.

As uncertainty continues, the best advice remains that we should all be buying only what we can afford. On top of that, we should be budgeting our lives to leave ourselves some breathing room, as opposed to living right out to the edge of our earnings. This provides a cushion for savings, for emergencies, and for that new hockey equipment or bike, for the kids.

It also leaves room for a nice vacation in a warm place for winter-exhausted parents.

Michael

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