Housing affordability index

What Is the Housing Affordability Index?

The Housing Affordability Index (HAI) is an economic indicator designed to measure whether the average American household can comfortably afford a typical single-family home. This metric falls under the broader category of Real Estate Finance, providing insights into the accessibility of homeownership. The index considers key factors such as household income, median home price, and prevailing interest rates to assess the financial capacity required for a mortgage loan on a typical home³⁴, ³⁵. A higher Housing Affordability Index value generally signifies greater affordability for potential homebuyers.

History and Origin

The Housing Affordability Index was developed and is regularly published by the National Association of Realtors (NAR)³², ³³. Its creation aimed to provide a consistent measure to gauge the capacity of a typical family to qualify for a mortgage loan on a typical home³¹. Over time, the index has become a widely cited benchmark for understanding trends in housing accessibility across the United States. For detailed historical data and reports from the NAR, one can refer to their official Housing Affordability Index page.³⁰

Key Takeaways

• The Housing Affordability Index assesses the ability of a median-income household to afford a median-priced home.
• An index value of 100 signifies that a household earning the median income has exactly enough income to qualify for a mortgage on a median-priced home²⁹.
• Values above 100 indicate greater affordability, meaning the median household has more than enough income, while values below 100 suggest less affordability²⁷, ²⁸.
• The calculation incorporates median household income, median home prices, and current mortgage interest rates²⁶.
• The index serves as a valuable tool for understanding broad trends in the real estate market and for general financial planning.

Formula and Calculation

The Housing Affordability Index is calculated by dividing the median family income by the income required to qualify for a mortgage on a median-priced home, then multiplying by 100²⁴, ²⁵. The calculation generally assumes a 20% down payment and a 30-year fixed-rate mortgage²², ²³.

The formula can be expressed as:

$\text{Housing Affordability Index} = \left( \frac{\text{Median Family Income}}{\text{Qualifying Income}} \right) \times 100$

Where:

• Median Family Income: The estimated median annual income for families in a given area.
• Qualifying Income: The income required to cover the monthly principal and interest payments for a mortgage on a median-priced home, assuming a standard debt-to-income ratio (e.g., 25% of gross income for housing payments)²¹. This income amount is derived from the median home price, prevailing mortgage interest rates, and the assumed down payment.

The Federal Reserve Bank of Atlanta also provides a similar measure, the Home Ownership Affordability Monitor (HOAM), which incorporates additional costs like taxes, property insurance, and private mortgage insurance into its total cost calculation.²⁰

Interpreting the Housing Affordability Index

Interpreting the Housing Affordability Index is straightforward. A value of 100 indicates that a family earning the median income has precisely the income needed to qualify for a mortgage on a median-priced home¹⁹. If the index is above 100, housing is considered more affordable; for example, an index of 120 suggests the median family has 120% of the income necessary to qualify¹⁸. Conversely, an index below 100 signifies that housing is less affordable, implying the median family does not earn enough to qualify for a mortgage on a median-priced home¹⁶, ¹⁷.

This index is a useful macro-level market analysis tool, providing a broad overview of the housing market's accessibility. However, it is essential to remember that it represents an average, and individual financial situations can vary significantly from the median.¹⁵

Hypothetical Example

Consider a hypothetical scenario for the Housing Affordability Index. Suppose the median home price in a certain region is $350,000. Assuming a 20% down payment ($70,000), the mortgage loan amount would be $280,000. If the prevailing 30-year fixed mortgage rate is 7%, the monthly principal and interest payment would be approximately $1,862. If the conventional qualifying ratio for housing payments is 25% of gross monthly income, the required monthly income to afford this payment would be $1,862 / 0.25 = $7,448. Annually, this "qualifying income" would be $89,376.

Now, if the median household income in that region is $80,000, the Housing Affordability Index would be calculated as:

$\text{HAI} = \left( \frac{\text{\$80,000}}{\text{\$89,376}} \right) \times 100 \approx 89.5$

An index of approximately 89.5 indicates that, in this hypothetical region, the median family earns only about 89.5% of the income needed to qualify for a mortgage on a median-priced home, suggesting that housing is less affordable than the historical benchmark of 100.

Practical Applications

The Housing Affordability Index is a vital tool used by various stakeholders in the financial and real estate sectors. Policymakers and government agencies utilize it to monitor housing market health and inform decisions related to housing subsidies, tax incentives, and other initiatives aimed at improving homeownership rates¹⁴. Economists and analysts rely on the index to assess overall economic activity and consumer financial well-being, as housing affordability can reflect broader economic conditions, including the impact of inflation. Lenders and financial institutions may use it to understand market trends affecting mortgage demand and risk assessment. Researchers also employ it to study long-term housing trends and the socio-economic impacts of housing costs. The Federal Reserve Bank of St. Louis, for instance, provides extensive historical data on the Housing Affordability Index through its FRED database, allowing for detailed economic analysis.¹³

Limitations and Criticisms

Despite its widespread use, the Housing Affordability Index has several limitations and has faced criticism. One major critique is its focus on median data, which may not accurately reflect the affordability challenges faced by specific demographic groups or individual households with varying needs, preferences, and socio-demographic characteristics¹¹, ¹². The index often assumes a uniform down payment and a specific type of mortgage, which might not align with diverse borrower profiles or available loan products.

Furthermore, the Housing Affordability Index primarily considers the ability to qualify for a mortgage, focusing on principal and interest payments, and may not fully account for other significant homeownership costs such as property taxes, insurance, utilities, and maintenance⁹, ¹⁰. Critics also point out that the 30% of income threshold often used as a benchmark for affordability can be somewhat arbitrary and may not be consistently meaningful across different income groups, especially very low-income households for whom even 20% could leave little for other necessities⁸. An article from the International Monetary Fund discusses how the index may not fully address the sustainability of homeownership in the face of interest rate and income shocks, and that its gains before the pandemic largely reflected low interest rates, which reversed sharply when rates rose.⁷ These critiques suggest that a comprehensive understanding of housing affordability requires considering additional factors beyond a single index, such as overall cost of living and the burden of debt.

Housing Affordability Index vs. Price-to-Income Ratio

The Housing Affordability Index and the price-to-income ratio are both measures used to assess housing affordability, but they differ in their calculation and interpretation. The price-to-income ratio is a simpler metric, calculated by dividing the median home price by the median household income. For example, if the median home price is $350,000 and the median household income is $70,000, the price-to-income ratio would be 5:1. This ratio provides a direct comparison of housing costs relative to earnings but does not account for prevailing interest rates or the specifics of mortgage qualification.

In contrast, the Housing Affordability Index is a more nuanced measure that explicitly incorporates mortgage interest rates and typical loan qualification standards. It calculates the income needed to qualify for a mortgage on a median-priced home and then compares it to the median household income. This makes the Housing Affordability Index more reflective of the actual financial hurdles to securing a mortgage and thus, to achieving homeownership, as it integrates the cost of borrowing money. While the price-to-income ratio offers a quick snapshot of relative expense, the Housing Affordability Index aims to provide a more comprehensive picture of purchasing power within the housing market.

FAQs

What does a Housing Affordability Index of 100 mean?

An index of 100 signifies that a household earning the national median income has exactly enough income to qualify for a mortgage loan on a typical, median-priced home⁶.

Who calculates the Housing Affordability Index?

The National Association of Realtors (NAR) is the primary organization that calculates and publishes the Housing Affordability Index for the United States.⁵ The Federal Reserve also publishes related housing affordability data.³, ⁴

How can the Housing Affordability Index help me with personal finance?

While the Housing Affordability Index provides a broad overview of the housing market, it serves as a general economic indicator and is not tailored to individual circumstances. For personal financial planning, it's important to consider your specific income, debt levels, credit score, local housing prices, and current interest rates when assessing your ability to afford a home.

Does the index consider all costs of homeownership?

The primary Housing Affordability Index from NAR mainly focuses on the principal and interest payments for a mortgage, factoring in median income, median home price, and prevailing interest rates². However, other affordability measures, such as the Federal Reserve Bank of Atlanta's Home Ownership Affordability Monitor, incorporate additional costs like property taxes and insurance to provide a more comprehensive view of the total cost of homeownership.¹