Housing Affordability

The April Existing Home Sales release published in late May showed a strong rise in home prices from a year ago.  What does this mean for affordability?  The answer may surprise you.

The April Existing Home Sales release published in late May showed a strong rise in home prices from a year ago—10.1 percent for the median priced existing home sold.  While this is great news for owners who can expect that the wealth they have accumulated in their property is holding steady and possibly increasing, on the surface this would seem to be troubling news for potential buyers who have not acted yet.  Have they missed the best time to buy?

The Housing Affordability Index, released today, holds some positive news for these would-be buyers.  As it turns out, the Housing Affordability Index suggests that the national median priced home was actually slightly more affordable for the median income family in April 2012 than it was in April 2011.  How is this possible?  While prices are up compared to one year ago, mortgage rates are nearly a percentage point lower and incomes are up, though only modestly.  Since the Housing Affordability Index factors in the effect of house prices AND income and mortgage rates, it is the case that nationally, the median priced home is slightly more affordable to the median income family than it was a year ago.  At 186.1 compared to 184.4, the Housing Affordability Index shows that the median income family earns 86 percent more than the income needed to qualify to purchase the typical home that was sold in April.  Regionally, affordability is improved over one year ago in every area except the West where the 15.9 percent year over year price gain offset increased income and the benefit of lower mortgage rates.  Still, even in the West, the median income family earns at least 50 percent more than is needed to qualify to purchase the median priced existing home.

Check out the data release here.

The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income).  See further details on the methodology and assumptions behind the calculation here.

Danielle Hale, Director of Housing Statistics

As a Research Economist at NAR, Danielle studies tax issues, the wealth impact of home ownership, and different measures of home prices.

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  1. Is there a long term concern on this very topic. I mean for years now the promotion of housing has been more affordable had not led to people getting mortgages to buy homes. Have to ask yourself this question. Over the next 20 years if we don’t get more jobs and wage growth to go with it. How do we offset inflation and the rise in interest rates over that period of time? Americans now have to qualify with their income and even with the weak core requirement of FHA there still isn’t enough buying. Not to mention that FHA has horrific capital reserve ratio and if there is 1 more job loss recession in the next 5 years they are going to need a bail out or massively change their core requirements.