Homeownership Affordable in Virginia C. Theodore Koebel, Ph.D. Virginia Center for Housing Research Virginia Tech A Report on the Virginia Homeownership Affordability Index 1 released jointly by the Virginia Association for Realtors and the Virginia Center for Housing Research July, 2001 The Virginia Center for Housing Research has estimated the affordability of homeownership across the Commonwealth based on the average sales price of homes sold through local Boards of Realtors and the median family income estimated by the Virginia Center for Housing Research. 2 The Virginia Housing Affordability Index is similar to the National Association of Realtors Affordability Index, which is provided for comparison. Housing affordability is generally measured by the percent of income required for housing. The Virginia Housing Affordability Index measures the affordability of the principal and interest payment for an average priced home as measured by recent sales prices. The average interest rate for the period reflects a fixed-rate mortgage including amortized origination fees, as measured by the Federal Housing Finance Board s interest rate survey for Virginia and the Washington DC Metropolitan Statistical Area (the latter is used for Northern Virginia locations in this MSA). The index uses a loan-to-value ratio of 80%, requiring a 20% downpayment, and a 30-year term (as does the NAR index). 3 Using a constant loan-to-value ratio, a constant term and a fixed-rate mortgage provides a measure of affordability that reflects shifts in house prices, interest rates, and incomes, rather than other variations in loan characteristics. The index uses 25% of income as the standard for affordability. Although underwriting standards allow housing cost-to-income ratios of 30% and higher, these more liberal standards include the cost of insurance, property taxes, and utilities in addition to principal and interest. Consequently, the 25% of income standard for principal and interest is used in calculating the index, as is the case for the NAR index. It is important to bear in mind that there are other costs associated with owner-occupied housing that influence affordability, mainly the down-payment and maintenance. If the cost of 1 For further information contact: Ted Koebel, Director, Virginia Center for Housing Research, Virginia Tech, Blacksburg, VA 24061, Phone: (540) 231-3993, Fax: (540) 231-7331, E-mail, tkoebel@vt.edu or Lisa G. Noon, ABC, Director of Communications & Marketing, Virginia Association of REALTORS, 10231 Telegraph Road, Glen Allen, VA 23059-4578, Phone: (804) 264-5033, Fax: (804) 262-0497, E-mail: Lisa@VARealtor.com 2 Based on the median adjusted gross income for married-couple families for counties and cities as reported by the Weldon Cooper Center from state tax records (Virginia Department of Taxation). 3 Average loan-to-value ratios range from 75% to 78% and average terms-to-maturity range from 27 to 29 years depending on the time period measured. 1
insurance, property taxes (usually a fixed percent of house value), utilities, and maintenance increase faster (or slower) than the cost of principal and interest on the average price house, the affordability index will overstate (or understate) actual affordability. A 20% down-payment requires an accumulation of savings that might pose a barrier to some potential buyers. Several mortgage programs allow much higher loan-to-value ratios and even reach 100% loan-to-value for qualifying borrowers. The Affordability Index is based on the percent of the median family income required for the principal and interest payment on the average priced house sold in the market area. Areas where the average housing price requires 25% or less of the median family income are considered affordable, whereas areas where the average price requires more than 25% of the median family income are considered unaffordable. The Affordability Index converts the percent of income required into a measure where a value of 100 indicates that 25% of the median family income is exactly equal to the annualized principal and interest payment on the average price house. The Index measures the degree to which a family with the median income and devoting 25% of that income can afford the principal and interest payment on the average price house. 4 The Index is calculated by dividing 25% by the percent of income required to purchase the average price house (then multiplying this by 100). The higher the Index is, the more affordable the area is. An index of 130 indicates that 25% of the median family income exceeds the required mortgage payment by 30%. An index of 90 indicates that 25% of the median family income falls about 10 percent below the required mortgage payment. In 2000 for the nation as a whole, 19.0% of the median family income was required to purchase the average house sold and the national affordability index (reported by the NAR) was 129.9 5 (see Table 1). In 12 of the 25 market areas in Virginia reporting sales prices to VAR, ownership affordability exceeded the national average. 6 For all but two market areas of the state, the average price house was affordable to the median income family and in many areas the average price house was affordable to much lower income families. The five most affordable areas of the state in 2000 for homeownership were Southside, Prince William, Dan River Region, Richmond, and Bristol. The percent of median family income required to purchase the average price house in these areas ranged from 12.7% to 16.6%, and index values ranged from 196 to 150. Although Prince William and Richmond had the third and fourth highest median incomes in the state in 2000, they had the seventh and eighth highest average sales prices. Southside, Dan River and Bristol benefit from moderate prices that are highly affordable despite modest incomes. The five least affordable areas of the state were Williamsburg, Greater Piedmont, Lexington, Chesapeake Bay and Rivers, and Northern Neck. In these areas, the average price home was either not affordable or only barely affordable to the median income family. The percent of median family income required to purchase the average price house ranged from 23.3% to 28.2% and Index values ranged from 107.3 to 88.8. In the Williamsburg area, housing prices are largely set by costs in or close to the City of Williamsburg, whereas the incomes in the broader market area are much lower than in Williamsburg. The Williamsburg market area includes the 4 Median house price is used in the NAR index. At this time, median house price is not available from the VAR data and the average (mean) price must be used. The mean price is likely to be higher than the median due to the influence of a few very high prices. The probable effect of using the mean rather than the median is to understate affordability. 5 The Index value of 129.9 equals 25% divided by 19.0% and then multiplied by 100. 6 An earlier year has to substitute for the year 2000 for a few market areas where average prices for 2000 were not reported. 2
city of Williamsburg, James City County, and parts of Charles City, New Kent and York counties. Lower affordability in the Greater Piedmont (Culpeper, Fauquier, Madison, Orange and Rappahannock counties), Chesapeake Bay and Rivers, and Northern Neck market areas could reflect the sale of higher priced homes to higher income households moving from the Charlottesville, Northern Virginia, and Williamsburg market areas, whereas the median family incomes of the recipient areas are much lower. An influx of higher income residents could bid up overall land and housing prices causing an affordability shock for other residents. (Definitions of each market area are provided in Table 3.) Despite being the areas with the highest housing prices in Virginia, the Northern Virginia and Dulles market areas also have the highest median incomes. (See Table 2, ranked by house price for 2000.) Southwest Virginia, however, falls below the national average for ownership affordability because of low incomes despite relatively low housing prices. The trend from 1998 to 2000 was generally for housing to become less affordable, reflected in an increase in the percent of income required for a house payment and a decrease in the Affordability Index. This was mainly because interest rates shifted upward. More recently interest rates have declined and the NAR Affordability Index rose to 139.3 for May, 2001. A similar improvement in affordability in Virginia could be expected. Despite period-to-period fluctuations in interest rates and differences in relative affordability across the state, the most important finding is that homeownership is affordable to the median income family in virtually all the housing market areas throughout the state. The available evidence confirms the overall affordability of homeownership in Virginia. Although some areas of the state are below the national average in terms of ownership affordability, overall the state remains a good area for homebuyers. According to the 2000 Census, Virginia s ownership rate of 68.1% was two points above the national rate of 66.2% and Virginia ranked 30 th among states in ownership, the same as in 1990. 3
Table 1. Affordability Index Payment as % of Income Affordability Index* 1998 1999 2000 1998 1999 2000 Area US (NAR)** 17.7% 18.0% 19.0% 139.7 136.3 129.9 Virginia Southside 12.41% 12.21% 12.73% 201.49 204.77 196.40 Prince William 14.30% 13.78% 14.85% 174.84 181.40 168.30 Dan River Region 14.93% 13.59% 15.81% 167.41 183.97 158.15 Richmond 15.75% 15.44% 16.56% 158.73 161.88 151.00 Bristol (1998 only)*** 16.61% 16.61% 16.61% 150.49 150.49 150.49 Martinsville 15.37% 15.23% 16.87% 162.66 164.13 148.16 Fredericksburg 15.94% 15.71% 17.09% 156.84 159.11 146.31 Lynchburg 17.18% 16.11% 17.90% 145.53 155.16 139.66 Virginia Peninsula 17.21% 16.63% 17.99% 145.23 150.36 138.99 South Central 15.46% 16.67% 18.15% 161.70 149.94 137.71 Staunton 16.73% 16.55% 18.81% 149.40 151.07 132.89 Massanutten 17.04% 16.14% 19.05% 146.73 154.89 131.27 Roanoke Valley 17.37% 18.46% 19.63% 143.89 135.40 127.36 Blue Ridge 17.03% 17.40% 19.80% 146.80 143.64 126.28 Dulles Area 18.25% 17.64% 20.04% 136.97 141.74 124.73 Harrisonburg 18.56% 18.95% 20.27% 134.73 131.94 123.35 New River Valley 18.01% 18.63% 20.58% 138.85 134.20 121.50 Southwest Virginia (1998 only)*** 20.75% 20.75% 20.75% 120.49 120.49 120.49 Northern Virginia 19.58% 18.95% 20.92% 127.70 131.91 119.49 Charlottesville (1998 and 1999)*** 23.24% 23.27% 23.27% 107.55 107.46 107.46 Williamsburg 20.35% 19.45% 23.29% 122.83 128.51 107.32 Greater Piedmont 21.28% 22.79% 24.13% 117.50 109.72 103.63 Lexington 22.12% 21.74% 24.94% 113.01 114.97 100.26 Chesapeake Bay and Rivers 23.04% 21.64% 25.35% 108.52 115.55 98.62 Northern Neck 21.93% 24.26% 28.17% 114.01 103.07 88.75 Eastern Shore**** Greater Hampton Roads**** *Index equals 100 times the ratio of 25% to the payment percent. Differences are due to rounding. **National Association of Realtors Composite Index ***Most recently available year substituted for later years when information is missing ****Sales price data unavailable Source: Virginia Center for Housing Research 4
Table 2. Housing Prices and Incomes Average Price Median Income Virginia Areas 1998 1999 2000 1998 1999 2000 Northern Virginia 228,296 236,884 251,590 75,233 82,101 86,159 Dulles Area 218,156 224,401 246,788 77,033 84,065 88,220 Williamsburg 181,713 182,704 207,517 57,541 62,057 63,828 Greater Piedmont 169,880 192,135 194,850 51,460 55,717 57,869 Chesapeake Bay and Rivers 154,741 151,315 168,464 43,293 46,211 47,613 Northern Neck 126,276 146,510 162,618 37,116 39,910 41,363 Prince William 146,055 149,845 156,303 65,832 71,842 75,393 Richmond 143,753 149,888 153,575 58,823 64,131 66,462 Fredericksburg 137,268 143,175 151,509 55,504 60,211 63,530 Lexington 132,341 139,290 150,955 38,556 42,327 43,375 Blue Ridge 122,867 132,327 143,770 46,500 50,237 52,031 Roanoke Valley 121,623 135,584 138,250 45,115 48,521 50,462 Virginia Peninsula 126,055 127,812 130,960 47,195 50,793 52,168 Harrisonburg 119,775 127,042 130,235 41,601 44,304 46,041 Lynchburg 114,630 114,134 121,890 43,008 46,806 48,788 Staunton 108,119 112,204 121,257 41,643 44,801 46,182 New River Valley 104,996 112,964 120,607 37,584 40,068 41,999 Southside 108,342 113,415 113,015 56,279 61,381 63,613 Massanutten 97,379 98,394 109,495 36,836 40,279 41,193 South Central 82,159 93,342 98,437 34,249 36,992 38,850 Martinsville 85,573 88,120 93,401 35,884 38,227 39,661 Dan River Region 87,484 82,682 91,731 37,757 40,204 41,578 Bristol 89,352 - - 34,667 37,694 39,354 Charlottesville 181,398 192,805-50,297 54,759 55,960 Southwest Virginia 103,365 - - 32,107 34,339 35,829 Eastern Shore** 29,750 31,451 33,029 Greater Hampton Roads** 46,666 50,227 51,607 **Sales price data unavailable Sources: Virginia Association of Realtors (prices) and VA Center for Housing Research (incomes) 5
Table 3. Definition of Market Areas Blue Ridge Greater Piedmont Northern Neck Southside Clarke County Culpeper County Essex County Chesterfield County* Frederick County Fauquier County King and Queen County* Dinwiddie County Warren County Madison County Lancaster County Greensville County Winchester City Orange County Northumberland County Prince George County Rappahannock County Richmond County Surry County Bristol Westmoreland County* Sussex County Washington County* Harrisonburg Colonial Heights City Bristol City Rockingham County Northern Virginia Hopewell City Harrisonburg City Arlington County Petersburg City Charlottesville Fairfax County Albemarle County Lexington Alexandria City Southwest Virginia Fluvanna County Rockbridge County Fairfax City Russell County Greene County Buena Vista City Falls Church City Smyth County Louisa County Lexington City Washington County* Nelson County Prince William Wise County Charlottesville City Lynchburg Prince William County Amherst County Staunton Chesapeake Bay and Rivers Appomattox County Richmond Augusta County Gloucester County Bedford County* Charles City County* Staunton City King and Queen County* Campbell County* Chesterfield County* Waynesboro City King William County* Bedford City Goochland County Mathews County Lynchburg City Hanover County Virginia Peninsula Middlesex County Henrico County Isle of Wight County* Martinsville King William County* York County* Dan River Region Franklin County* New Kent County* Hampton City Halifax County Henry County Powhatan County Newport News City Pittsylvania County Patrick County Richmond City Poquoson City Danville City Martinsville City Roanoke Valley Williamsburg Dulles Area Massanutten Bedford County* Charles City County* Loudoun County Page County Botetourt County James City County Shenandoah County Craig County New Kent County* Fredericksburg Franklin County* York County* Caroline County New River Valley Roanoke County Williamsburg City King George County Bland County Roanoke City Spotsylvania County Carroll County Salem City Not included Stafford County Floyd County Alleghany County Westmoreland County* Giles County South Central Bath County Fredericksburg City Grayson County Amelia County Buchanan County Montgomery County Brunswick County Dickenson County Greater Hampton Roads Pulaski County Buckingham County Highland County Isle of Wight County* Wythe County Charlotte County Lee County Southampton County Galax City Cumberland County Scott County Chesapeake City* Radford City Lunenburg County Tazewell County Franklin City Norfolk City Portsmouth City Suffolk City Virginia Beach City *Only a part of the county is included in the market area Mecklenburg County* Nottoway County Prince Edward County 6
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