Housing Affordability Made Simple

1caa5-picture_device_independent_bitWe all hear talk on the street about “Housing Affordability”, but I wonder if it has ever really been explained in a way that everyone could understand? The following is the answer to my question:

Each month the National Association of Realtors (NAR) releases their Housing Affordability Index. The index measures the affordability of a home based on what a typical family earns. It assumes the borrower has a 20% down payment (80% loan to value) and a “front ratio” or housing ratio not to exceed 25% of gross income. It is based on a typical home at the national and regional levels based on the most recent monthly price and income data.

An index of 100 is defined as the point where a median-income household has enough income to qualify for the purchase of a median-priced existing single-family home. Currently 194%! Housing prices and mortgage rates influence the index. Generational low mortgage rates coupled with lower home prices following the housing collapse have left the index at an all time high.

According to NAR, “For all of 2012, NAR projects the housing affordability index to be a record high 194, up from 186 in 2011, which was the previous record.” That means that the typical family earns 194% of the income necessary to purchase the typical house. Put another way, the same family can afford almost twice as much house.

Rising housing prices coupled with rising interest rates could dent affordability. NAR projects the housing affordability index will average 160 during 2013. Recent data on housing indicates the market is recovering. Buyers who take advantage of the current situation of low rates and affordable housing are set to secure their financial futures. The future is always uncertain but there is no uncertainty in these historically low rates. Now is a great time to take advantage of them.

A rising index means more affordability

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