They call economics the “dismal science,” but many of the statistics related to single-family housing have been downright sunny during recent years. “The housing boom has really been a key factor in keeping the economy from slipping into a worse recession than it was,” says Celia Chen, director of housing economics at, an economic research firm in West Chester, Pa. “The main losers have been the multifamily market and manufactured housing.”

Renters have become home buyers, home sellers have moved into bigger houses, minorities and young households have invested in their own real estate earlier than in the past, and homeowners have kept the economy afloat by tapping into their considerable reserves of home equity. As a result, housing starts, new-home sales, and home-price appreciation have all provided bright spots for consumers and the housing industry while so many other sectors lingered in the doldrums.

But statistics are only a snapshot; they don't necessarily show what else belongs in the picture. As strong a force as housing has been for supporting the economy and building household wealth, there continue to be differences of opinion about how such numbers should be viewed and interpreted.

Mixed Effects Home price appreciation provides a key example. According to the most recent data from the Office of Federal Housing Enterprise Oversight's house-price index, home prices increased sharply in the last quarter of 2003, registering a 7.97 percent gain over the last quarter of 2002. That's great news for current homeowners, who are building wealth while they reduce their monthly housing costs through refinancings. At the same time, such steep advances in home prices make it increasingly difficult for first-time buyers to actually purchase a house, especially those who must rely on a single income.

Income is another mixed bag. While Americans' personal income as a group has nearly doubled in the past decade, according to statistics from the Bureau of Economic Analysis, the median family income has grown just 3.4 percent annually between 1990 and 2003, which is a slower rate than home prices. Another factor often overlooked in affordability indexes: the rise of dual-income households. In more than 50 percent of married American households, both husband and wife work.

Meanwhile, household debt levels have climbed. In 2003's third quarter, American households spent more than 13 percent of their monthly disposable income on debt service payments. While most of that debt comes from lower-interest, long-term mortgage debt considered to be a better investment than high-interest credit card or installment loans, the upward trend leaves some concerned, worried that record low interest rates and record home appreciation rates have provided a financial cushion that may not last.

“I think we've been in a very fortunate period where interest rates have kept going down, but because housing prices have risen [so regularly], the people who are getting into homes are stretched to the max,” says John Vogel, faculty director of the Allwin Initiative for Corporate Citizenship at Dart-mouth University and author of a recent paper on the American mortgage market for the Urban Land Institute. “I think it's fair to say we've oversold homeownership as an investment and undersold it as a place to live.”

No Second Chances There have been some worrisome trends emerging in the home-buying wave. Chief among them: the number of home buyers turning to adjustable-rate mortgages and interest-only loans at a time when rates for 30-year mortgages are historical bargains. “There is definitely a concern among a certain segment of the home-buying population that they are overextending themselves,” Chen says. “It is a sign that some folks may end up getting into trouble down the road.”

Many already are. While the overall delinquency rate for residential mortgages has fallen, according to recent data from the Mortgage Bankers Association, there are trouble spots. In Austin, Texas, home foreclosures in one county this spring hit a 13-year high, according to news accounts. The New York Times recently published a detailed look at a widespread wave of foreclosures in Pennsylvania's Poconos, considered a distant but affordable bedroom community to New York City.

For many families and communities, the job market—or lack thereof—has been a major factor in their troubles. Nationally, job losses tend to forecast trends in the foreclosure market, according to the Mortgage Bankers Association, and this economic recovery has been notoriously slow to produce new jobs. If that changes, so would the number of families who live on the edge. “If the economy does improve, that will enable a lot of these families to keep up with their payments,” Chen says.

Of course, as any homeowner or builder knows, there's more to home-ownership than just the monthly mortgage payment. Repairs, maintenance, increases in property taxes, and other variable and sometimes unexpected costs can throw even financially stable families for a loop, making such costs all the more challenging for those homeowners who scrape each month to make their payments. Such costs are rarely included in housing affordability indexes. But make those payments they must, because it may be their one and only chance to own a home. According to a recent study by a University of Washington researcher, very few low-income families who return to renting get a second chance to buy a home.

Squeezed Out As interest rates and home prices rise, though, that opportunity will slip away from more than low-income families. As soon as this year, a first-time home buyer with a 10 percent down payment will have trouble qualifying to buy today's median-priced home, according to a new report by Fannie Mae Foundation researcher Zhong Ti Tong. “This flourishing housing market has benefited homeowners and energized the nation's economy,” Tong writes. “But the dramatic price appreciation, coupled with the slow pace of income growth, is making homeownership increasingly unaffordable for median-income working Americans, especially those seeking to purchase a home for the first time.”

His prediction? Not even a repeat home buyer making the median family income will be able to get a mortgage for a median-priced home by 2007, assuming mortgage rates rise 0.5 percentage points annually and home prices and incomes continue their average rate of increase. “It would be the first time in about two decades that even middle-class families who could afford to put 20 percent down would be squeezed out of the median-priced housing market.”

Armed For Adversity? Source: Mortgage Bankers Association

Ape for Arms: Adjustable-rate mortgages, which feature interest rates several points below the 30-year, fixed rate, have typically been a safety valve for consumers in times of high mortgage rates. But recent data shows that home buyers are opting for ARMs more and more frequently, even as 30-year fixed rates hover in the 5 percent range.
Year Average 30-year, fixed mortgage rate Percentage of mortgages using ARMs
2000 8.04% 20
2001 6.93% 10
2002 6.43% 15
2003 5.68% 19
2004* 5.76% 30
* Through June 4, 2004

Sobering Statistics Source: Fannie Mae Foundation

Shut Out: In 2004, first-time home buyers will face a difficult time qualifying to buy a median-priced home, according to a recent study by the Fannie Mae Foundation. These projected figures make the following assumptions: Buyers will have a 10 percent down payment, interest rates will rise 0.5 points annually, and home prices will increase 4.8 percent annually—a much slower rate of increase than in recent memory.
Year Median house price Effective interest rate Monthly housing expense Qualifying income for mortgage Median family income
2004 $178,100 6.24% $1,336 $57,200 $56,300
2005 $186,700 6.74% $1,470 $63,000 $58,200
2006 $195,800 7.24% $1,616 $69,200 $60,200
2007 $205,300 7.74% $1,774 $76,000 $62,300
2008 $215,200 8.24% $1,944 $83,300 $64,400