Housing Affordability

Housing Affordability

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. Housing prices and mortgage rates influence the index. Generational low mortgage rates coupled with lower home prices following the housing collapse left the index at an all-time high in 2012. That changed over the past year and a half.

According to NAR, the housing affordability index hit 196.5 in 2012. That means that the typical family earned 196% of the income necessary to purchase the typical house. Put another way, the same family could afford almost twice as much house. Unfortunately rising home prices and slightly higher mortgage interest rates in 2013 caused that number to fall to 175.8. 

Rising housing prices coupled with rising interest rates could continue to dent affordability. Recent data on housing indicates the market is wobbly despite some pockets of strength. 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 favorable rates. Now is a great time to take advantage of them.

Be sure you tell your buyers that this is a Great time to buy a home.