A Housing Affordability Index and Average Home Prices


What is a housing affordability index?


The housing affordability index means just that: an index that provides a snapshot of median home prices and affordability prerequisites for a given area or neighborhood during a specific period of time. The housing affordability index provides critical residential real estate information for several target audiences. Prospective real estate buyers and sellers, investors, mortgage loan companies, banks, title companies, real estate brokers, agents, and appraisers may use the index to find out about housing health in local or regional areas over a specific period of time.

United States housing affordability indices can vary by city, state or region at a given time like a month or year. Some housing regions are more affordable than others. Paying attention to affordability index scores, which serve as a composite gauge for household affordability, may let the prospective homebuyer know if he or she can afford a median-priced home in a desired neighborhood. As is often the case, the housing affordability index is greatly affected by three factors: location, location, and location. High, housing area desirability may often equate to a lower affordability index score.

Several real estate associations like the National Association of Realtors (NAR) or statewide associations like the California Association of Realtors (CAR) provide housing affordability indices. Some factors or prerequisites that may be included in determining a housing affordability index score include:

  • median-priced existing, single-family home

  • mortgage rate

  • monthly payments including principal and interest (depending on down payment and loan amount)

  • mortgage percentage of income

  • median family income

  • qualifying income for a given area over a specific time period. From this information, affordability index scores are tallied.

For example, in 2003, a loan amount of $300,000 on a single-family, median priced home in the Sacramento metropolitan area of California, priced at $360,000 (with a down payment of 20 percent), at a fixed, 30-year mortgage rate of 6.00 percent would equal a monthly mortgage payment of $1162.14. The prospective purchaser of this home would need a qualifying income of about $72,000 per year to make the monthly principal and interest payments.

Currently, only approximately 16 percent of California homeowners qualify to buy a median-priced home as reported by the California Association of Realtors (CAR). Paying attention to the housing affordability index

and index affordability scores is a fundamental way to gauge future housing strength or weakness. If the prospective homebuyer does his homework by studying the ebb and flow of residential real estate trends and reports such as the local housing affordability index, decisions can be made in a proactive and intelligent manner. The alternative is to follow the emotional whims of the short-term investor, adding fuel to rumor and confusion.

In summary, the housing affordability index is a fundamental indicator of housing health, a snapshot in time, determining the percentage of homeowners or first time buyers that can afford to purchase a median-priced home in a desired city, state or region of the country. Typically, housing prices in highly desired areas of the country continue to rise. Real estate markets are cyclical, but a homeowner, sticking to his investment for the long term, may have the last laugh.

Answered over 11 years ago
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