You have no doubt seen or heard the press mention that the ‘Affordability’ index is at or near record levels. The NAR’s Housing Affordability Index (HAI) rose to the range of 160-170 this year, setting record high levels.
Housing Affordability – Whichever Index You Look at, The Value Story is Great for Buyers
First, there are actually several indexes out there from various sources. For example, the NAHB (National Association of Home Builders) has one they call the Housing Opportunity Index or HOI and the NAR (National Association of Realtors) publishes the Housing Affordability Index or HAI.
While both indicate we are at or near record levels, I want to focus on the NAR index as the topic of today’s note. There are ‘hot links’ to both above in case you want to access the actual reports.
The NAR Housing Affordability Index – What is It?
Essentially, the index is a measure of the financial ability of U.S. families to buy a house.
In the simplest terms, an index value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home.
An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.
The NAR Housing Affordability Index – Trending Higher
The current index at the end of 2009 stood at 171.6 and you can see below that is 56 points above where it was at the end of 2007!
What this shows is that the relationship between home prices, mortgage interest rates and family income is very favorable right now.
The NAR has said that it is the most favorable since tracking began in 1970!
The Impact of Mortgage Rates
While pricing is obviously important, mortgage rates drive a significant piece of the affordability puzzle. The chart below shows the context of today’s low rates – It really tells a story and spells out the opportunity presented in the current market.
It’s important to keep in mind that for every increase of 100 basis points (or 1% in rate); the monthly payment goes up about $63 per month for each $100,000 borrowed. Over the life of a 30-year loan, that can add up quickly - to $22,680 for each $100k borrowed.