If you are mulling over the idea of moving and need to compare to a variety of different places you are interested in relocating to, you will no doubt want to assess the cost of housing. The National Association of Realtors® (NAR) makes it easy to make comparisons. NAR has been keeping track of the housing affordability index nationally for many years, which enables you to see how the index has changed over time. The index is published on a monthly basis from 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 which is earning the median income nationally and that of the area you are researching. Income data from the U.S. Bureau of the Census is used. The typical home is the median-priced single-family home nationally, as reported by NAR monthly, and in the area you are researching.
The next factor that needs to be considered 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. All three of these factors are considered in the equation to determine the index.
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 for computation of 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 comes up with 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 the median priced home. When the index rises above 100, that means the median income earned has more than enough income to qualify for that median priced home. Expressed another way, an index of 120 means that the 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 that much. It would be like getting a national average weather report to decide whether to take a coat to work that day. You get the idea, Minneapolis vs. Miami. But let’s take a look at the national affordability index anyway!
In 2018 the national affordability index peaked in January at 164.3. Nationally, homes were least affordable in June 2018 with an index of 137.7.
Locally the affordability index for Boulder County looked like this:
According to Kelly Moye, a Colorado Association of Realtors® spokesperson, “Buyers finally saw a bit of improvement in affordability. In essence, our housing market is as affordable this January as it was last January. There is finally more inventory and with a slight dip in consumer confidence in the last quarter of 2018, the supply actually outweighed the demand. The prices went down during this season and we actually finished with a lower median sales price in January 2019 than we did in 2018. That makes this market more affordable, something our buyers have been wishing for five years!”
Contact a Realtor in the place you’re thinking about moving to, and the Realtor will be able to access the index for that specific relocation destination.
You can also visit the NAR website at nar.realtor/research-and-statistics/housing-statistics/housing-affordability-index
By Duane Duggan, RE/MAX of Boulder. Duane Duggan 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.