Local home affordability up, but demand doesn't follow

(Crain's) — The prolonged housing slump has produced a paradox: Local homes are more affordable than they have been in at least a decade, but not many people can — or want to — buy one.

The National Assn. of Home Builders/Wells Fargo Housing Opportunity Index, a measure of affordability, has exceeded 68% in the Chicago area over the past seven quarters, a level it last attained in 1999. The local index bottomed out at 40.3% in the third quarter of 2007.

The number represents the percentage of local homes sold in a given quarter that are affordable to a median-income family. The index has climbed in recent years as home values and mortgage rates have fallen and the area's median income has risen.

It's a rare positive indicator in an otherwise gloomy market, though few buyers are taking advantage of the trend, either because they can't qualify for a mortgage or believe prices have further to fall.

“While it's tremendous right now, and now is the best time to buy a home perhaps in our lifetime . . . there's just not the motivation to do it,” says Lance Ramella, principal at RW Real Estate Advisors LLC, an Oakbrook Terrace-based real estate consultant.

Though federal tax credits boosted home purchases earlier this year, local sales fell 36% in October from a year earlier, the fourth straight monthly decline, according to the Illinois Assn. of Realtors.

The local affordability index, meanwhile, hit 68.2% in the third quarter, down from 69.4% in the second quarter but up from 65.5% a year earlier. The Chicago index has tracked with the national index, which hit 72.1% in the third quarter.

As home prices soared in the middle of the past decade, housing advocates worried that middle-income residents would be priced out of the market and pushed out to far suburbs in their quest for affordable housing.

Yet getting a mortgage was a breeze back then. Many buyers who would have qualified for a loan five years ago can't afford the larger down payment to get one now. And cautious lenders are taking a much closer look at a prospective borrower's financial status and credit history.

Many would-be buyers are also nervous about taking the plunge, amid mixed signals about the direction of the job and housing markets. The Standard & Poor's/Case-Shiller index of Chicago-area single-family home prices declined 1.5% from August to September after rising for five straight months.

“I am fairly confident we're at the bottom in terms of home pricing,” Mr. Ramella says. “I'm not sure most consumers are.”