Housing Bubble

Housing Affordability Index reaches 30-year high

May 01, 2003

Lower mortgage interest rates offset higher home prices and improved housing affordability conditions in the first quarter to the highest level in 30 years, according to the National Association of Realtors®.

NAR's composite Housing Affordability Index reached 144.0 during the first quarter, up 3.7 percentage points from 140.3 reported in the fourth quarter of 2002, and was 8.2 points higher than the same period a year earlier when it stood at 135.8. The previous high was an index of 147.9 recorded in 1973.*

The index shows the nation's typical household had 144.0 percent of the income needed to purchase a home at the first quarter median existing-home price, which was $161,500. This index measures affordability factors for all homebuyers making a 20 percent downpayment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home. The first-quarter median family income was $52,929, which would qualify to buy a home costing $232,600.

NAR President Cathy Whatley, owner of Buck & Buck Inc. in Jacksonville, Fla., said home sales are reflecting the index. "Existing-home sales were at an all-time record during the first quarter, showing the favorable affordability conditions are coinciding nicely with a strong underlying demand for homes," she said. "This has contributed to a record homeownership rate of 68.3 percent in the United States as more and more families are able to afford the American dream."

David Lereah, NAR's chief economist, said affordability conditions could wane slightly. "Although the rate of increase in home prices is expected to slow, a gradual rise in mortgage interest rates is likely to work against higher incomes and the index could ease several percentage points by the fourth quarter," he said. "Even so, affordability conditions this year will remain favorable for the vast majority of American households."

According to the Federal Housing Finance Board, the average effective mortgage interest rate for existing homes was 5.90 percent during the first quarter, down from 6.11 percent in the fourth quarter; it was 6.86 percent in the first quarter of 2002. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

Affordability for first-time homebuyers improved to a four-year high, rising 1.8 percentage points in the first quarter to 83.2 from a reading of 81.4 in the fourth quarter; it was 3.7 points higher than the first quarter 2002 index of 79.5. This is the highest since the first quarter of 1999 when it hit 86.0.

The association's First-Time Homebuyer Affordability Index shows a typical first-time buyer household, aged 25 to 44, with an income of $30,078, had 83.2 percent of the income needed to purchase a typical starter home with a 10 percent downpayment. The median starter home price was $137,300, during the first quarter; the typical first-time buyer could afford a home costing $114,200.

"Although affordability conditions for first-time buyers have always lagged repeat buyers, they're in a better position today, given historically low mortgage interest rates," Whatley said. "Typically, this means starting out in a lower-cost property and building equity over time in order to trade-up to a larger home. The important thing is to get started when you can because when you trade rent for a mortgage, that's the day you start to build housing wealth for the future."

NAR began the housing affordability index in 1981; annual data has been calculated going back to 1970.

Source: National Association of REALTORS®