How Legitimate is the NAR Housing Affordability Index

Mortgage and Lending with Canopy Mortgage, LLC NMLS 124492

REALTOR.orgRecently, I was sucked into a conversation around the water cooler about home affordability and the impact on the real estate market. The primary topic of the conversation was that home ownership was more affordable than in years past and that first time home buyers would flood back to the market.

When I asked how does one calculate home affordability, no one really had an answer. One individual did mention that they heard something on the news about the National Association of Realtors (NAR) realeasing a Housing Affordability Index.

I wanted to get the facts behind the published report; therefore, I visited the resource section of and browsed the reports. NAR definitely has a tremendous amount of data to analyze through its members and is highly motivated to keep their organization relevant.

At first glance, the numbers were impressive. The Housing Affordability Index reached an all time-high in January 2009 with a reading of 172.6. When we talk about all time-high, this means since the inception of the index in 1971. For comparison, the index was 107.6 at the peak of home values in 2006.

Could this be true? How could home ownership be more affordable now in the worse recession since the Great Depression than any other time in the history of the index? How could it be more affordable considering all the additional costs as a result of credit risk-based pricing coupled with higher agency delivery fees due to declining markets?

Lets evaluate the methodology of the index for existing single-family homes:

  1. Score of 100: median income is sufficient to qualify for mortgage on median-priced home.
  2. Score > 100: median income is more than enough to qualify for mortgage on median-priced home.
  3. January's Value 172.6 means that the median income family has 172.6% of the income necessary required to qualify for the median-priced home.
  4. Mortgage qualifications assume 20% down & 25% housing payment (principle & interest) to total debt ratio.

Now it made sense. One thing that everyone can agree on is the fact that home values have fallen off a cliff in the past 18-36 months. In matter of fact, home values have fallen faster than income levels. As of the most recent Housing Affordability Index, the median-priced home in January was $164,200 compared to $221,900 at the peak of home values in 2006.

The other issue that I have with the methodology is the big assumption that housing affordability is based on families that have a 20% down payment...essentially, straight conventional loans only. The last time I checked, FHA insured loans (3.5% minimum down payment) had the highest percentage of year-over-year growth in loan applications due to the stricter guidelines being mandated by Fannie Mae, Freddie Mac and the Federal Housing Finance Agency.

Don't get me wrong folks. I am not a pessimist. I want to be bullish on the housing market.

By the way, I truly believe that home ownership is more affordable than I have ever seen in my lifetime; nonetheless, I still question the merits of NAR's index.

How legitimate is the NAR Housing Affordability Index? Does anyone care?

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Comments (11)

Travis Newton
Salem and Bend Oregon FHA, VA & USDA 503.931.4490 - Salem, OR

Great post James! That will answer a ton of questions for folks!

Apr 07, 2009 11:38 AM
Tom Pulsifer
Associate Broker

I know in my area it doesn't make a world of difference what the affordabilty index is.... if people don't feel secure in their jobs it doesn't make a difference what the index is! Buyer trafic has picked up as of late but getting them to make an offer now that is another story!

Apr 07, 2009 12:18 PM
John Cannata
214-728-0449 - Frisco, TX
Texas Home Mortgage - Purchase or Refinance

Congratulations on the Featured Post!  Its hard to believe the numbers... 172%  Thanks for doing the research and sharing the results.

Apr 07, 2009 03:34 PM
Marian Gregor-Ann
Keller Williams - Ann Arbor, MI
Arbor area Real Estate

James, The smart people buy during a downturn. This is exactly the time when millionaires are made. If you have a secure position you'd be wise to get into the market. The fear factor of media doom & gloom has kept many for taking advantage of this unprecedented buyers market.

Apr 07, 2009 04:24 PM
Mike Henderson
Your complete source for buying HUD homes - Littleton, CO
HUD Home Hub - 303-949-5848

The other factor that you didn't talk about what the interest rates are.  At all time lows this is another huge factor.

Apr 07, 2009 04:25 PM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Figures don't lie, but liars figure.  I am not calling the NAR liars, but the saying reminds me that numbers are not always what they seem.

Apr 07, 2009 05:14 PM
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

I don't put total faith in NAR's numbers or anyone elses. I am a great believer that the market will adjust itself to affordability. If prices are down in South Florida 50% from 2005 does that mean its affordable? Maybe or maybe not. With real qualifying loans and no magic financing available, all markets will reach its correct price because there is nothing artificial to prop it up. Let's hope that a government bailout plan to come will not artifically keep prices too high. Let the market do their work.

Apr 08, 2009 07:21 AM
Robert T. Boyer
FHA Loan, VA Loan, Jumbo Loan,FHA Loans,VA Loans,Jumbo Loans - La Jolla, CA
San Diego Real Estate & Mortgage Loans, Ph.D. | VA Home Loan

The affordability index is a great _STANDARD_.  No one is claiming it is perfect.  But it provides a benchmark by which we can evaluate the ability of an "average" person to own a home in a given market.  It lets us better understand a given market in relation to it earlier-self.

These figures should not be used to promote a belief that buyers _are_ going to flood back into the market.  But, you could make the case that buyers _could_ come back, if they chose.  As pointed out earlier, there are many reasons why buyers are holding back (and for a change - in my city - it's not about affordability).

And, before anyone gets too steamed up that the typical person doesn't have 20% down, or that every buyer is different, or that every home is different.  The point of average is to transcend the problems of individuality and give us a measure from which to work and make general statements - such as "affordability".

Apr 08, 2009 12:41 PM
Jeff&Grace Safrin
F.C.Tucker 1st Team Real Estate - Valparaiso, IN

We ask buyers what they are comfortable paying per month not what they can afford ( no matter what the pre-approval letter says they can spend :) - big difference - being house poor - affording the home payment but hardly anything else i.e vacations, savings, investments, etc... never made sense.

May 08, 2009 05:00 AM

James, The smart people buy during a downturn. This is exactly the time when millionaires are made. If you have a secure position you'd be wise to get into the market. The fear factor of media doom & gloom has kept many for taking advantage of this unprecedented buyers market.


May 15, 2009 07:40 AM
Michele Reneau
Certified Staging Professional (CSP) Elite Instructor - Summerville, SC
Realtor, GRI ~ Charleston, SC Relocation Experts Team

I'm not so sure on the methodology but I must say in my market that prices have definitely come down. However, incomes have stayed the same and real estate prices exceeded the rate of income a long time ago. Although there are a few pockets of town where you can buy for less than you can build. Smart buyers that are prepared can take advantage of this and hang tight for inflation to set in.

Oct 01, 2009 01:40 PM