About 58 (+/- 0.6 in 1993, +/- 0.8 in 1991) percent of American families could afford to purchase a modestly priced house in 1993, the same as in 1991. In other words, they could afford to purchase a house in the area where they lived with cash, or they could qualify for a 30-year conventional mortgage with a 5 percent downpayment at the prevailing interest rate.

About 19 (+/- 1.3) percent of white married couples who rent could afford a modestly priced house in 1993, compared with 8 (+/- 2.3) percent of black married couples who rent.

Most families who were renting in 1993 could not qualify to buy a modestly priced house for several reasons; about 46 (+/- 1.2) percent had both excessive debt and insufficient income for a mortgage.

Providing a down payment subsidy would improve affordability more than a lower down payment or a decline in interest rates.

Compared with 1984 and 1988, when 60 (+/- 1.0 in 1984, +/- 0.5 in 1988) percent of American families could afford a modestly priced house, housing affordability was less in 1993 and 1991, with 58 (+/- 0.6 in 1993, +/- 0.8 In 1991) percent being able to afford a house. Data are not available for other years.

The percentage of families able to afford a modestly priced house in the area where they lived using 30-year conventional fixed-rate financing with a 5 percent down payment was the same (58 percent) in 1993 as in 1991. The percentage of unrelated individuals who could afford to buy a modestly priced house was also the same (33 percent) in 1993 as in 1991. This information is based on data collected by the Survey of Income and Program Participation (SIPP) during the first four months of 1993 on income, debts, and financial assets. (see Table 1)

A modestly priced house is one priced so that 25 percent of all owner-occupied houses in the area are below this value and 75 percent are above. A median-priced house has a price below half of the owner-occupied houses in the area and above the other half. A price-adjusted house is a median-priced house in 1988 adjusted for increases in prices due to inflation from 1988 to 1993. Low-priced houses are priced so that 10 percent of all owner-occupied houses in an area are below that value and 90 percent are above. A maximum-priced house is the highest-priced house a family or unrelated individual can afford, given the limitations of income, debts, and financial assets. House prices were determined for the nine census divisions and by whether a house was inside or outside a metropolitan area or in or out of a central city of a metropolitan area. For example, a modestly priced house in the suburbs of the South Atlantic Division of the South Region was $65,000 in 1993.

About half of all families could afford a median-priced house, a price-adjusted house, or a condominium home in the area where they lived in 1993. Fifty-eight percent of families could afford a modestly priced house, and sixty-two percent could afford a low-priced house. About one-fourth of all unrelated individuals could afford a median-priced house, a price-adjusted house, or a condominium home in 1993, while about 33 percent could afford a modestly priced house, and 40 percent could afford a low-priced house.

For all families and unrelated individuals in the South region, 50 percent could afford a modestly priced house in 1993, higher than the 48 percent in the Northeast. Affordability was greater in the Midwest where 55 percent could afford a modestly priced house, but less in the West where only 42 percent could afford to buy one. In central cities of metropolitan areas, 39 percent could afford a modestly priced house, compared with 55 percent in suburban areas, and 53 percent outside metropolitan areas.

The ability to purchase a modestly priced house differs significantly by whether you currently own or rent your present residence. For renters, only 11 percent could afford a modestly priced home in 1993. By contrast, 73 percent of owners could afford to relocate to a modestly priced home in the same area in 1993. In 1991, 13 percent of renters and 71 percent of owners could afford a modestly priced house in their area.

The median maximum-priced house that could be afforded for purposes of relocating by owner families in 1993 (using conventional financing) was $138,100, significantly higher than the 1991 value of $121,500. The median maximum-priced house in 1993 was $80,900 for unrelated individual owners, compared with $72,400 in 1991. The median maximum-priced house renter families and unrelated individuals could afford was less than $20,000 in both 1993 and 1991.

While half of all families and unrelated individuals could afford a modestly priced house, affordability varies greatly by type of family and marital status. Two-thirds of married couples, about two in five of male-householder families, one-fourth of female-householder families, and one-third of all unrelated individuals could afford a modestly priced house. For families, the ability to afford a modestly priced house is also related to whether they had children under the age of 18. For married couples with children under 18, about three out of five could afford a house, but for those with no children under 18, over three-quarters could afford a house.

When the race and ethnic background of individuals is considered, homeownership affordability differs, even when similar family types are compared. About one out of five (19 percent) white married couple renters could qualify to buy a modestly priced house, while only 8 percent of black married couples who rent could do so. About 83 percent of white married couple homeowners could afford to relocate to a modestly priced house in the area where they lived, compared with about seven out of ten black married couple owners.

Seven percent of Hispanic married couples who rent could afford a modestly priced house, compared with one out of five (20 percent) non-Hispanic married couples. Married couple homeowners of Hispanic origin could afford to relocate to a modestly priced house 63 percent of the time, compared with 83 percent for non-Hispanic married couple homeowners.

Age is also a factor related to affordability. Householders in families who rent who could not afford to buy a modestly priced house were slightly younger (median age 34.6) than all householders in families who rent (median age 35.5), and much younger than householders in families who own their home (median age 48). Householders in families who are homeowners who could not afford to relocate to a modestly priced house were also younger (median age 38) than all householders in families who are homeowners.

Only 2 percent of renter families with less income than the median for all renter families could afford a modestly priced house, while 11 percent with incomes above the median could afford to buy. Three primary reasons explain why families and individuals cannot afford to purchase a house: lack of cash or other financial assets for the down payment and closing costs, insufficient income to make the mortgage payments, and other debt payments which reduce the amount of income available for the mortgage payment. Financial assets include equity in a homeowner's present house, cash, and other assets that can be converted into cash.

Of those renter families who could not qualify, most (65 percent) could not qualify for more than one reason. For example, about 46 percent had both excessive debt and insufficient income for a mortgage, while 19 percent lacked cash (for the down payment and closing costs) and also had insufficient income to qualify for the mortgage. The largest single reason owner families could not afford a modestly priced house was because their debt level was too high to qualify for a mortgage (27 percent). (see Table 2)

Many people are interested in ways to increase the ability of families and unrelated individuals to purchase a home. Three basic policy alternatives which are often discussed are (a) lowering interest rates, (b) requiring a lower down payment for home purchasers, and (c ) providing a down payment subsidy to home buyers. Using SIPP data, it is possible to estimate the potential effects of such policies for owners and renters, using both conventional financing and FHA-insured financing. In this discussion, the focus will be on using conventional financing for renters purchasing a modestly priced home in 1993.

Surprisingly, decreases in the mortgage interest rate of less than three percent compared with the interest rate prevailing in 1993 (7.17 percent) had no significant effect on the number of renters who would have qualified for a mortgage. Because renters typically have more than one obstacle to buying a home, lower interest rates might remove one obstacle -- lack of income to qualify for a loan -- but they still might not have enough cash for a down payment and closing costs or might have debt levels that are too high. A three percentage point lower rate would, however, increase the number of renters who would have qualified for a mortgage by about one percentage point.

It is also possible to qualify more renters by decreasing the required down payment on a house to below five percent. This option would lower the amount of cash required for the purchase, but it would also increase the amount of income necessary because mortgage payments would increase as a result of the higher amount of the mortgage. A decrease in the amount of required down payment from 5 percent to 2.5 percent would have resulted in an increase in renters who would qualify for a mortgage by 1 percentage point (from 11.4 percent to 12.7 percent). Requiring no down payment would have increased the qualified renters by 3 percentage points.

Another option to increase the number of renters who would qualify for a mortage is a down payment subsidy. This approach is the same as receiving a gift from parents or others to increase the amount of cash available for a downpayment, closing costs, or debt repayment. A subsidy of $1,000 would have increased the number of renters who would qualilfy for a mortgage by 1 percentage point; $2,500, by 3 percentage points; $5,000, by 14 percentage points; $7,500, by 21 percentage points; and $10,000, by 25 percentage points. (see Table 3)

Some policy makers have focused on how homeownership affordability could be improved for minority groups, such as Blacks and persons of Hispanic origin. A lower interest rate would have had no significant effect on the percentage of Black or Hispanic renters who could qualify for a mortgage for a modestly priced house in 1993.

Reducing the required down payment from 5 percent to 2.5 percent for Black renters would have increased the number who could qualify for a mortgage on a modestly priced house in 1993 by 1 percentage point. Having no down payment would not have had a significantly different effect from having a down payment of 2.5 percent. Reducing the down payment to 2.5 percent for Hispanic renters would have had no effect on affordability. Reducing the required down payment to zero would have increased the number who could qualify for a mortgage on a modestly priced house by 1 percentage point in 1993.

It would require at least a $2,500 subsidy to significantly improve the percentage of Black renters who would have qualified for a mortgage in 1993. A $2,500 subsidy would have increased the number of Black renters qualified for a mortgage by 2 percentage points in 1993, a $5,000 subsidy by 15 percentage points, a $7,500 subsidy by 21 percentage points, and a $10,000 subsidy by 24 percentage points.

It would also have required at least a $2,500 subsidy to significantly improve the percentage of Hispanic renters who would have qualified for a mortgage. A $2,500 subsidy would have increased the number of Hispanic renters who would have qualified for a mortgage by 2 percentage points, a $5,000 subsidy by 10 percentage points, a $7,500 subsidy by 16 percentage points, and a $10,000 subsidy by 19 percentage points.

For further information contact:
Robert Callis
Social, Economic and Housing Statistics Division
301-763-3199
Email: robert.r.callis@census.gov

This report presents information of current policy interest, using data from households. All statistics are subject to sampling variability, as well as survey design flaws, respondent classification errors, and data processing mistakes. The Census Bureau has taken steps to minimize errors, and analytical statements have been tested and meet statistical standards. However, because of methodological differences, use caution when comparing these data with data from other sources. For information on the source of data and the accuracy of estimates, including the use and computation of standard errors, see the "Source and Accuracy Statement for the 1990 and 1992 Public Use Files from the Survey of Income and Program Participation." NOTE: Further information on the source and accuracy of these data are found in the Internet site for this report.