You’ve heard the term – Housing Affordability Index – but what does this real estate jargon actually mean?
What is the Housing Affordability Index?
The Housing Affordability Index is a valuable tool designed to gauge whether the average American household can comfortably afford a typical single-family home. The National Association of Realtors (NAR) created the metric, leveraging data from government censuses and national home sales data.
The Inner Workings of the Housing Affordability Index
Calculating the Index
To determine housing affordability, NAR uses data on the sale of existing homes (excluding new construction), mortgage rates, and household income. Here’s the breakdown:
Step 1: NAR compiles U.S. census data to determine median annual household incomes in different metropolitan areas.
Step 2: A number known as “qualifying income” is reverse-engineered by taking the monthly mortgage payment for a typical single-family home and multiplying it by 4 (weeks in a month) and then by 12 (months in a year). This qualifying income represents the amount a household should earn monthly to qualify for a mortgage. Note: NAR assumes a 20% down payment and a 30-year fixed-rate mortgage.
Step 3: NAR then divides the actual median income from the US census by the qualifying income just calculated.
Step 4: Finally, they multiply this last number by 100 to create the official housing affordability index number.
Why Multiply by 100?
This multiplication by 100 simplifies the index’s interpretation. A score above 100 signifies that housing is more affordable, while a score below 100 indicates it’s less affordable. It’s a straightforward way to grasp the current state of housing affordability. I know what you’re thinking, that doesn’t sound very straightforward, so let’s use an example to better show how the housing affordability index is calculated.
An Example Calculation
To make all of this less abstract, let’s consider an example from 2021:
- The U.S. median household income in 2021 was $70,784.
- By the fourth quarter of the same year, the median home purchase price reached $423,600.
- Mortgage rates during this time hovered between 3.0% to 3.12% before they started rising in 2022.
For this scenario, to find the qualifying income:
Step 1: Calculate the monthly mortgage payment for a $423,600 home at 3.05% interest rate with a 20% down payment. It comes to around $1,438.
Step 2: Multiply this monthly payment by 4 (weeks in a month) and then by 12 (months in a year). The annual qualifying income in this example is $69,024.
Step 3: Now, we compare the actual income with the qualifying income: $70,784 (actual median income) / $69,024 (income required to qualify for the loan) = 1.025
Step 4: Finally, we multiply this result by 100: 1.025 x 100 = 102.5
In this example, the average American household had approximately 102.5% of the income required to qualify for a mortgage on a typical single-family home. This indicates that buying a home was reasonably affordable at that time. Remember, a score above 100 signifies that housing is more affordable than a score below 100.
How Can You Use The Index?
The Housing Affordability Index offers a concise way to gauge whether homeownership is within reach for the typical American family. It’s a valuable resource for anyone looking to understand the dynamics of the national housing market and plan for their own homeownership journey. It’s important to keep in mind that local real estate trends differ from national trends, just like your own personal financial situation will likely differ from the national average provided through census data.
To chat about your unique situation and our local real estate market, don’t hesitate to reach out! While we are not financial advisors, we are your local real estate experts and we’re happy to share our knowledge to help you better understand the current real estate market in Southwest Florida.
