Home Affordability at 2-Decade Low

Almost a third of U.S. home buyers chose risky “interest only” mortgages in 2005 as a record jump in prices drove affordability to a two-decade low, according to a Harvard University study released Tuesday.

The average mortgage payment in 2005 rose to 24% of the U.S. median income after taxes, the highest since 1984, when it was 25%, adjusted for inflation, according to the report by Harvard’s Joint Center for Housing Studies.

Home prices rose 9.4% in 2005, the largest annual gain in more than 40 years of record keeping, the report said. Thirty percent of new mortgages last year were products that allowed buyers to pay off no principal, and some allowed deferred interest payments that could result in people owing more than they borrowed, the report said.

“Stretching to afford ever-more expensive homes, borrowers increasingly turned to mortgage products other than fixed-rate loans to lower their monthly payments,” the report said.

So-called interest-only adjustable-rate mortgages that defer principal payments in the early years of the loan rose to 20% of the dollar value of all mortgages last year, the report said.

Payment-option adjustable rate mortgages, often called option ARMs, increased to 10% of the total.

Option ARMs have introductory rates as low as 1.25% and allow buyers to pay a minimal amount that can result in them being “upside down” in the mortgage, or owing more than they borrowed.

Interest-only mortgages, with rates currently at about 4.25%, allow borrowers to defer paying principal. Both types of loans were unusual two years ago.

The average rate for a 30-year fixed mortgage was 6.22% last year, and the median home price was a record $219,000. In 1982, rates reached an all-time high of 15%, and the median home price was $131,305, the report said.