Housing Affordability Index: Definition from Answers.com Mobile

standard established by the National Association of Realtors (NAR) to gauge the financial ability of consumers to buy a home. A reading of 100 means a family earning the national median family income (reported by the Census Bureau) can qualify for a mortgage on a typical median-priced existing single-family home. An index above 100 signifies that a family earning the median income more than qualifies for a mortgage loan on a median-priced home, assuming a 20% Down Payment. Therefore, an increase in the Affordability Index shows that a family is more able to afford the median-priced home. The prevailing mortgage interest rate is the effective rate on loans closed on existing homes from the Federal Housing Finance Agency (for the United States) and HSH Associates Financial Publishers (for various regions). The mortgage is based on an 80% loan (20% down payment) and a qualifying ratio of 25%, meaning that 25% of the borrower’s gross monthly income will be needed to cover housing costs, including the mortgage. The 25% qualifying ratio covers expected principal and interest payments but does not cover taxes and insurance.
There are three different types of indices calculated by NAR. The Fixed Rate Index is based on the current effective interest rate on 30- year fixed rate mortgages. The Adjustable Rate Index is calculated using the prevailing effective interest rate on adjustable rate mortgages.
The Composite Index uses a weighted average of the interest rates on fixed and adjustable rate mortgages, weighted by the relative proportion of fixed and adjustable rate loans closed on existing homes.
NAR also calculates a first-time home buyer Affordability Index, which recognizes the special characteristics of first-time home buyers and the homes they purchase. The group most likely to purchase a first home consists of a young renter family with a head of household aged 25 to 44 and a lower median income than the overall population. This index assumes a 10% down payment, and adds one quarter of a percentage point to the mortgage rate for the required private mortgage insurance. The first-time home is calculated at 85% of the median price of all existing homes purchased. Some economists maintain that every one-point increase in the home mortgage interest rate results in 300,000 fewer home sales.

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