Pondering the thought of moving? You will undoubtedly want to compare housing affordability in the area you would like to relocate to. The National Association of Realtors® (NAR) has a tool to make this comparison. NAR has been tracking this index nationally for many years, making it easy to see how the index has changed over time. The index is published on a monthly basis by NAR.
The housing affordability index measures whether or not a “typical” family could qualify for a mortgage on a “typical” home. Already, that raises some questions. What does typical mean? For purposes of the calculation, the typical family (or home buyer, if the “family” is just one person) is referring to a family earning the median income nationally and that of the area you are researching. Income data from the U.S. Census Bureau is used. The typical home is the median-priced single-family home nationally as reported by NAR in the area you are researching.
The next factor taken into account is the prevailing interest rates for mortgage loans. NAR uses the effective interest rate on loans closed on existing homes as published by the Federal Housing Finance Board.
But wait, there’s more! A couple more assumptions need to be made. The calculation is going to assume two more factors. First, a down payment of 20% of the home price. Second, a qualifying ratio of 25%. A qualifying ratio of 25% means the monthly principal and interest payment cannot exceed 25% of the median family’s income.
If you are really interested in the entire formula used to compute the index, the exact calculations are available on the NAR website. For purposes of this article, let’s just talk about the results of the algorithm. Once the calculations have been applied and a number comprising the index as a result, what does it mean?
A value of 100 means that a median-income family has the exact amount of income to qualify for the monthly mortgage payment at the current interest rate for a median-priced home. When the index rises above 100, that means the median income earned has more than enough income to qualify for a median-priced home. Expressed another way, an index of 120, means that income earner has 120% of the income required to buy the median-priced home. As that number increases to say 150, the income earner has 150% of the income needed, which in turn means as the index goes up, affordability goes up. At the other end of the scale, an index of 80 means the income earner is only making 80% of what is required to buy that median-priced home, which in turn means homes are less affordable.
Remember, all real estate is local, so national statistics don’t really mean very much. It would be like getting a national average temperature in a weather report to decide whether to wear a coat to work. You get the idea: Minneapolis is vastly different from Miami. Let’s take a look at the index closest to us. The affordability index for the Denver metro area including Boulder County looked like this (see Historical Housing Affordability Index by Month graph below).
Here is the data expressed in a different format (See Affordability Index – Metro District chart below). Remember, above 100 is the index baseline. The higher the number indicates the highest affordability.
Housing was the most affordable shortly after the recession ended, and as you can see, the recent housing inventory shortage has created the lowest, least affordable index in years.
Contact a Realtor® in the area where you are relocating to and the Realtor® will have the resources to obtain the index for that area.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.