Homebuyers are Stretching the Most in these Cities

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.

Key findings

  • 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.
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.

 

Source: LendingTree Study

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