Housing Affordability Index

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% downpayment. 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 Board (for the U.S.) and HSH Associates of Butler, NJ (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 homebuyer 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.

An indicator of the proportion of the population that can afford to buy the average home sold during the current period. There are many types of affordability indexes in use. One of the best-known is the index compiled by the National Association of Realtors. The index is formed by the ratio of a percentage of the average income of all families in the area to the monthly loan payment needed to purchase the average priced home sold in that area. An index value of 1.00 indicates that half of the families in the area could afford to buy the average home. The higher the index, the more affordable is the housing in the area.

A measurement of housing affordability compiled by the National Association of Realtors^® and other groups. The intent is to measure the ability of area residents to buy homes in the area. A typical index compares median income to the income required by lenders for a loan large enough to buy a median-priced home. A median income higher than required is interpreted as an affordable condition, and the index will be greater than 100 or 1.00, depending on how it is expressed. Values below 100 or 1.00 signal unaffordable conditions. Indexes are available for various geographic regions, as well as specialized indexes for first-time buyers.
Example: The median family income in Somewhere, USA, is $4,000 per month. The Qualifying Ratio of principal and interest payments to income used by many lenders is 28%; this would be $1,120 per month (0.28 x $4,000 = $1,120). The median price of homes in Somewhere is $125,000. An 80% loan would be for $100,000, which (at 6% interest over 30 years) requires principal and interest payments of $599.55. The affordability index value is the result of comparing the median qualifying income of $1,120 to the $599.55 payment to derive a ratio of 1.868, which may be multiplied by 100 for an index value of 186.8.