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Housing crunch hits middle class

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Recent developments in home prices, interest rates and mortgage markets have only moderately improved conditions for middle-income households struggling to purchase or keep a home, a new study says.

Middle-income families have been hardest hit by the housing boom and will be most affected by the bust, says a report conducted by Moody’s Economy.com and sponsored by Homes for Working Families.

Rising house prices since 2000 have worsened housing affordability by 89 percent, says the study, “Analyzing Affordability in Metropolitan Housing Markets: An Examination of Affordability for Middle-Income Households.”

A rise in income over the corresponding period softens the blow by only 23 percent, and lower interest rates have had negligible impact.

This declining affordability has hit current and would-be middle-income homeowners the hardest.

The study defines middle-income workers as those who earn 60 percent to 120 percent of the median income for their region.

In most places, that means teachers, retail workers, police officers and office workers, few of whom qualify for affordable housing programs.

Affordability has increased only modestly for most of these households, despite slight declines in home prices since late 2006, and the study found almost no improvement in 40 focus cities.

“While the housing market’s correction is causing house prices to decline, the fall in prices is not enough to restore housing affordability for middle-income households in many metropolitan areas,” Celia Chen, director of housing economics at Moody’s Economy.com, says in a statement.

“Hit harder by price increases during the housing boom, it will be harder for middle-income households to make up this lost ground during the bust,” she says.

The report predicts that even with future price reductions, housing affordability will remain well below late 1990s levels.

Middle-income families who already are homeowners also face a greater risk of losing equity, the study says.

The report found that during the boom, home prices in the tier accessible to middle-income families increased significantly faster than homes in pricier tiers. Now those prices are falling more dramatically.

The benefits of these falling prices to potential purchasers likely will be offset by the credit crunch and projected mortgage interest rate hikes, the study says.

The difference in availability of affordable housing from one location to another also has increased, the report says.

The study ranked 40 metropolitan communities with the greatest housing affordability gap for middle-income workers.

Eight of the top 10 markets in which buying a median-priced house was not affordable for middle-income households were in California, with San Francisco and Los Angeles topping the list.

New York, Seattle, Boston, Chicago and Miami also made the top 20.

Middle-income families who live in these least-affordable metropolitan areas will take the greatest hit from the subprime mortgage crisis, the study says.

Many of them stretched their budgets to buy a house during the boom, and now their monthly payments are rising and credit is tightening, making mortgage repayments even tougher for those already struggling.

Moody’s Economy.com is a subsidiary of research firm Moody’s Corp. that provides economic analysis, data, forecasting and credit risk services to various commercial clients.

Homes for Working Families, an advocacy group that seeks to provide workers access to affordable homes, commissioned the report as the first in a series of analyses on home purchase and rental affordability.

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