The Ultimate Truth about Housing Affordability

There have been many headlines decrying an “affordabilitycrisis” in the residential real estate market. While it istrue that buying a home is less affordable than it had been overthe last ten years, we need to understand why and what thatmeans.

On a monthly basis, the National Association ofRealtors (NAR), produces a Housing Affordability Index.According to NAR, the index…

“…measures whether or not a typical familyearns enough income to qualify for a mortgage loan on a typicalhome at the national and regional levels based on the most recentprice and income data.”

Their methodology states:

“To interpret the indices, a value of 100 means that afamily with the median income has exactly enough income to qualifyfor a mortgage on a median-priced home. An index above 100signifies that family earning the median income has more thanenough income to qualify for a mortgage loan on a median-pricedhome, assuming a 20 percent down payment.”

So, the higher the index, the more affordable it is to purchasea home. Here is a graph of the index going back to 1990:

It is true that the index is lower today than any year from 2009to 2017. However, we must realize the main reason homes were moreaffordable. That period of time immediately followed a housingcrash and there were large numbers of distressed properties(foreclosures and short sales). Those properties were sold at largediscounts.

Today, the index is higher than any year from 1990 to 2008.Based on historic home affordability data, that means homes aremore affordable right now than any other time besides the timefollowing the housing crisis.

With mortgage rates remaining low and wages finally increasing,we can see that it is MORE AFFORDABLE to purchase a home today thanit was last year!

Bottom Line

With wages increasing, price appreciation moderating, andmortgage rates remaining near all-time lows, purchasing a home is agreat move based on historic affordability numbers.