Carpe Diem

Housing affordability remains near historic high levels, which means the flourishing housing recovery will continue this year

Housing affordability remains near all-time historical high levels, according to data released today by the National Association of Realtors, and suggests that the flourishing housing recovery that started last year will continue in 2013.  For the month of November, the median U.S. annual family income of $61,758 represented almost twice (198.2%) the income necessary ($31,152) to qualify for a 30-year mortgage at 3.50%, which would be used to finance the purchase of the median-priced single-family home ($180,600), assuming a 20% down payment.  Therefore, the Housing Affordability Index (HAI) in November was 198.2 ($61,758 / $31,152 = 198.2%), which is close to an all-time high.  The HAI was above 200 for the first three months of 2012, but fell below 200 in November (and in most other months except October) as rising home prices (up 10% since last November) have more than offset the effect of falling mortgage rates (4.37% last January).  Another way to think about the historically high housing affordability is to consider that a family with the median income of about $62,000 could actually qualify for the financing necessary to purchase a $358,000 home, but could buy today’s median-priced home for about half that amount.

Bottom Line: With housing affordability close to historic high levels, we can expect ongoing increases in home sales this year, since buying a home at today’s prices, financed with today’s historically low interest rates, can be the “deal of a lifetime,” especially for first-time home buyers.

18 thoughts on “Housing affordability remains near historic high levels, which means the flourishing housing recovery will continue this year

  1. This post is delusional Mark. Assuming a family making $31,000 being able to put 20% down is bordering delusional. NOBODY should be buying a home that is 6x their income. The HAI is is a joke of a barometer. What banks are qualifying families making $62,000 to purchase $358k homes??? This is false information and flat out irresponsible to suggest otherwise. Deja vu anyone???

    • Payments for a $180,600 home, with a 20% down payment, financed at 3.50% for 30 years, would be only $649 per month, which would be 25% of the gross monthly income of $2,596 for a family making $31,152 per year. For a family making $62,000 annually ($5,144 monthly), the monthly payments on a $358k home would be $1,286 and would be 25% of monthly gross income.

      The HAI is calculated based on constant assumptions over time of: a) a 20% down payment and b) monthly house payments for Principal and Interest of a maximum of 25% of gross monthly income. Those assumptions are applied to a median priced home, with financing at the current 30-year fixed rate, using the median family income.

      You can change those assumptions (10% down payment, and/or maximum monthly house payments of 20% of gross monthly income) and the HAI line in the graph will shift up or down, but the historical pattern will be the same, and housing affordability will still be close to an all-time high.

      • apart from using family income instead of household, which seem like a deliberate slanting of the results (detailed comment on that below) i have another question on the assumptions here:

        baked into this affordability index is the assumption that a median family can get a prime rate 30 year fixed mortgage.

        is that true?

        my understanding is that required credit histories and fico score to get such loans have become far more stringent.

        so can a median household get that rate?

        i do not claim to know, but if they can’t, then this index seems to be likely to mislead.

  2. I’m not denying your math Mark, i’m just saying its not based on reality…it’s based off “perfect scenarios”. Truth is most people, especially first time homebuyers, have no where near 20% to put down. Also mortgage payments include taxes and most of the time home insurance which you should calculate into monthly payments. These additives would make the payments balloon upwards. The fact is people should be buying at 3x salary at maximum, anything higher and we should expect trouble in the future. Things aren’t getting cheaper and we ain’t swimming in wage increases lately.

    • Aquanerd

      Mark has explained to you how the HAI is calculated. It is an *index* not a buyers guide. The point of the post is that it’s at historic high levels, which means that housing is more affordable now than at any time since at least 1980.

      Whether people should or shouldn’t buy isn’t the point. That’s for individuals to determine for themselves, based on their own circumstances and preferences.

      For simplicity and consistency only gross income and P&I are used, to make comparisons over time easier. It would be practically useless as an index if net income, insurance and taxes were included, as those vary greatly based on individual circumstances and location.

      • @Ron H.

        All I’m saying is that the HAI is telling us that housing is affordable at 6x salary and Matt even ran numbers on it to show me. But when you run real numbers as pertaining to real income you find out that its not affordable at all. So what’s it an indicator for? If its useless for real net income with taxes and such included, then who is benefitting from it? The NAR? You actually make my point when you say it’s not a buyers guide… Exactly, so who does it pander too? The banks? In my opinion, it’s just a faulty index based on little info that assumes best case scenarios with down payments. It’s basically worthless.

        • As I explained, the historical pattern of the housing affordability index would be the exactly same if you make the assumptions “more realistic” – e.g. 5% down payment, monthly payments only 20% of gross income, a house at 20% below than the median price, etc.

          The line might shift down, but housing affordability would still be at historical high levels.

        • Aquanerd,

          The purpose of an index is to compare different time periods. If you believe the index is faulty, then you should demonstrate that housing affordability was greater in year X than it was in year Y, while the index value was greater in year Y than in year X. If you only talk about conditions in year X but make no comparison to year Y, then what you say has no bearing on the quality of the index.

        • Aquanerd

          All I’m saying is that the HAI is telling us that housing is affordable at 6x salary and Matt even ran numbers on it to show me. But when you run real numbers as pertaining to real income you find out that its not affordable at all.

          Only you can determine what is “affordable” for you. It’s a completely subjective term. Yes, the HAI may be unrealistic and is a marketing tool for the NAR. However – the methodology used and the assumptions made, have not changed over the period shown. Therefore – claiming that affordability is at historic highs is correct, and the chart correctly shows *relative affordability* since 1980.

          You can change any parameters you wish to reflect your own definition of affordability, and the line will show the same shape, if not the same amplitude. It’s not likely that you will find housing to be more affordable at some other period of time since 1980.

          So what’s it an indicator for? If its useless for real net income with taxes and such included, then who is benefitting from it? The NAR?

          Yes, the NAR benefits, and those wishing to compare “affordability” over time benefit.

          You actually make my point when you say it’s not a buyers guide…

          No one has claimed otherwise. There is no point to be made about that.

          Exactly, so who does it pander too? The banks? In my opinion, it’s just a faulty index based on little info that assumes best case scenarios with down payments.

          It is an *index*.

          It’s basically worthless.

          Then don’t use it.

  3. Also… I’m a big fan of calculating things in net pay not gross pay like you have done. $5144 is gross pay. With taxes taken out its more like $3850 monthly… So a $1286 + taxes and your looking at 35-40% of your money going towards your housing… Not a good idea for families.

  4. People need to live somewhere:

    Rents Going Up in Orange County, Matching National Trend
    Oct 18, 2012

    “Rent in large apartment complexes in Orange County is at an all-time high…risen to an average of $1,628…Los Angeles County, where rent averaged an even higher $1,751, saw the same 4.7 percent increase since 2011…Daly City, south of San Francisco, saw rent go up 21.4 percent over last year.”

  5. Gotta say, what does the CPI measure?

    Housing cheaper than ever, manufactured goods of all kinds (especially electronics) cheaper than ever, and food cheaper than ever, relative to income.

    Medical costs more, but is a lot better.

    College is a real problem, for the reasons Perry has outlined.

    But overall, seems like living costs have been going down not up.

    Is the Fed following a false cue, in that the CPI and PCE overstate inflation?

    Don Boudreaux of Mason U. says so.

    Print more money Bernanke, and print a lot of it!

    • benji-

      that argument makes no sense at all.

      so, if the price of a car goes from $50k to $55k but interest rates drop from 6% to 0%, that’s deflation?

      i do not think you understand what “price level” means.

  6. Housing does appear poised for more gains in 2013, but the pace will not be as quick as it was in 2012. Housing Starts has formed a tentative business cycle peak in October and internal trends suggest this peak will hold.

    So, expect ongoing rise in the construction trend in 2013, but not at the 20%+ pace we saw in 2012.

  7. i take some issue with the methodology the NAR uses here.

    they seem to be trying to slant the results by using median FAMILY income instead of median HOUSEHOLD income which is considerably lower.

    ($50k vs $62k)

    as family income requires marriage and genetic decent. it also must be at least 2 people.

    a household is people who share a house including individuals who own a home and reside in it themselves.

    from the census bureau:

    What is the difference between households and families?
    A family consists of two or more people (one of whom is the householder) related by birth, marriage, or adoption residing in the same housing unit. A household consists of all people who occupy a housing unit regardless of relationship. A household may consist of a person living alone or multiple unrelated individuals or families living together. You may access all of the CPS definitions at

    http://www.census.gov/population/www/cps/cpsdef.html

    household seems like a far better metric for affordability that family. what, single people do not count for affordability?

    the NAR overstates income by roughly 25% by using “family” instead of “household”.

    i do not know whether and to what extent using household income would alter the trend in “affordability” which, itself is a far too limited metric as it presupposes that you have a down payment and ignores negative equity in current homes and looks only at payments, but what i think we can say for sure here is that the %’s of household income and ratios of price to income are actually much higher if you use the more appropriate number.

    keep in mind that the NAR is a marketing organization and want to drive demand for houses. they are using the most advantageous possible (to be generous) or outright slanted and inappropriate (my opinion) data here.

    • If the NAR alternatively used household income instead of family income, the Housing Affordability Index (HAI) would be lower in each month, and the absolute value of the index would change, but the relative value wouldn’t be affected. The entire line in the chart above would shift downward, but the pattern in the graph would be basically the same, and the HAI would still be at, or close to, an all-time high. The two variables that are most important in determining monthly housing affordability are: a) house prices and b) mortgage rates.
      As long as we compare monthly mortgage payments to some consistent measure of monthly income (could be the poverty level income, annual income at the minimum wage, or income that is 50/75/125% of the median), we can track the relative affordability of the median-priced house, financed at the prevailing 30-year mortgage rate.

      Even though it really doesn’t matter for relative affordability, it seems more realistic to me to assume that more “families” buy houses as a family, than “households” buy houses as a household.

      “A household may consist of a person living alone or multiple unrelated individuals or families living together.”

      How many “families living together” or “multiple unrelated individuals” buy houses together? And to the extent that “unrelated individuals living together” are gay couples, or unmarried couples, they would be qualifying for a mortgage very much like a married couple, i.e. a “family.”

      All in all, it’s “much ado about nothing” to me.

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