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The Street
The Street
Dominic Diongson

What Is the Housing Affordability Index? Definition & Limitations

Americans looking into whether they can buy a home could turn to the Housing Affordability Index.

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What Is the Housing Affordability Index?

The Housing Affordability Index measures whether a potential homeowner can afford to take out a 30-year fixed mortgage to purchase a single-family home in a metropolitan area. It is compiled and maintained by the National Association of Realtors, a trade group representing more than 1.5 million real estate professionals in the U.S.

How Is the Housing Affordability Index Used?

The index is an important measure that gauges the affordability of home purchases. A person seeking to buy a home in a particular area could use the Housing Affordability Index to determine whether to take out a mortgage for financing the purchase of a home based on their household income and home prices in their area.

The index determines whether a family with a certain median income can afford and qualify for a mortgage on a median-priced home, and it’s used by real estate professionals, including realtors and property developers, to assess potential sales and construction.

How Is the Housing Affordability Index Calculated?

The index is calculated by taking data on sales of existing single-family homes (not new ones), monthly mortgage rates, and household income. The NAR’s calculation is based on median income and qualifying income.

The NAR derives the median annual income from government census data, and compiles its own data on existing home sales from its monthly survey. The composite index includes indexes for metropolitan areas and indicates the level of affordability for a typical single-family home across the U.S.

Composite Housing Affordability Index = (Median Income / Qualifying Income) * 100

Qualifying income refers to the income that’s necessary to qualify for a loan. In other words, it’s the amount of mortgage that a homeowner is able to pay. The index, however, assumes that a homeowner has put 20% of the price of the house as a down payment and takes out a 30-year mortgage. The NAR calculates qualifying income as monthly mortgage payment (with principal and interest) multiplied by 4 (which reverses the 25% ratio on monthly housing expense to gross monthly income) and by 12 (for the 12 months in a year).

How Is the Housing Affordability Index Interpreted?

The index uses a base level of 100, with higher numbers indicating higher affordability and lower numbers indicating lower affordability.

For example, the median annual income in one neighborhood in the Midwestern part of the U.S. is $60,000, and the qualifying income is $48,000, which translates into an index of 125. Based on the NAR’s calculation for qualifying income, that translates into a monthly mortgage payment of $1,000.

The index at 125 means that, according to the NAR’s interpretation, a typical household has 125% of the income to qualify for a mortgage that covers the 80% of the cost of a median-priced single-family home. In general, the higher the household income, the higher the affordability. But factors such as an increase in interest rates could make the purchase of homes less affordable.

An Example of the Housing Affordability Index

Rising mortgage interest rates could reduce affordability, while lower rates could increase a family’s ability to pay for and own a home. In the 12 months prior to April 2023, interest rates started to rise, and there were more months below 100 than there were above 100. In 2020 and 2021, on the other hand, the index was well above 100.

What Are the Limitations of the Housing Affordability Index?

The index focuses on single-family homes that have been sold previously and doesn’t include sales of newly constructed housing. The index doesn’t include other important expenses such as property tax, home insurance, and maintenance costs—all of which could end up costing more than a monthly mortgage payment.

The index doesn’t account for the affordability of renting or other types of home ownership, such as multi-family homes.

What Is the 28% Mortgage Rule?

The 28% rule is a popular guideline that states that monthly housing costs (mortgage, insurance, property tax, and other related costs) should not exceed 28% of gross income. Households whose payments exceed 28% may face challenges in maintaining savings and keeping up with other expenses, including car payments, food, and children’s education.

When Is the Housing Affordability Index Released?

The monthly report that includes the index is released on the second Friday of each month at 10 a.m. ET. A quarterly report is released on the second Friday of the month following the end of each calendar quarter at 10 a.m. ET.

Are There Indexes or Measures Similar to the Housing Affordability Index?

Goldman Sachs (NYSE: GS) compiles its own Housing Affordability Index, which measures how much of a financial burden a mortgage is to purchase a home. The index tracks housing markets in the U.S. and other countries, including Canada, France, the U.K., and Australia.

The Federal Reserve of Atlanta, one of 12 district banks of the Federal Reserve, has its own measure called the HOAM (Home Ownership Affordability Monitor) Index. The index measures how much a median-income household can absorb the estimated annual costs tied to the ownership of a median-priced home.

The California Association of Realtors compiles its own Housing Affordability Index to measure the housing markets in major cities such as San Francisco and Los Angeles, which tend to be among the urban areas with the highest-priced homes.

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