2012 On Pace to be Record Year for Housing Affordability

by devteam January 9th, 2013 | Share

Even though home prices have beenrnrising, the National Association of Realtors® (NAR) said today that 2012 appears primed to set arnrecord for housing affordability.  Withrn11 months of data in, NAR’s Housing Affordability Index was at 198.2 inrnNovember, down 2.5 index points from October but 1.5 points higher than inrnNovember 2011.  When December data is compiled, NAR projects that thernhousing affordability index for 2012 will be a record high 194, up from 186rnfrom 2011, the previous record year.  </p

The index is based on the relationship between medianrnhome price, median family income, and average mortgage interest rate.  An index of 100 is the point where arnhousehold with a median income for the local area has exactly enough income tornqualify for the purchase of a median-priced single family home in thatrnarea.  The assumptions are the buyer hasrna 20 percent downpayment and that the resulting mortgage payment would not exceedrn25 percent of gross income. The higher the index, the greater the householdrnpurchasing power and buyers with small downpayments, typical of first-timernbuyers, would have relatively lower affordability levels.  </p

In computing the index NRA used a national median homernprice of $180,600 and median income of $61,758. rnThe principal and interest payment would be $649 which represents 12.6 ofrnhousehold income.</p

In the Northeast the median home price was $230,000 andrnincome was $71,066 resulting in an index of 180.1, up from 178.4 inrnOctober.  The Midwest had the highest indexrnat 250.7, up 0.5 from October, based on a home price of $143,100 and income ofrn$61,732.  In the South the median homernwas priced at $161,300 and the income was $56,821 for an index of 204.8, downrnfrom 210.6.  The West had the lowestrnaffordability index of all regions at 145.8, down from 147.2.  The median home price in the west wasrn$251,200 and the median income was 63,527. </p

Lawrence Yun, NAR chief economist,rnsaid home buyers are able to stay well within their means.  “Although 2012rnwas highest on record, the excessively tight underwriting precluded many would-bernhomebuyers from locking-in generational low interest rates,” he said. rn”Rising home prices and a gradual uptrend in mortgage interest rates willrnoffset improvements in family income, but 2013 likely will be the third best onrnrecord in terms of household buying power.  A window of opportunityrnremains open for buyers who can qualify for a mortgage.”</p

NAR projects the housingrnaffordability index to average 160 during 2013, which means on a national basisrnthat a median-income family would have 160 percent of the income needed tornpurchase a median-priced existing single-family home.  Conditions varyrnwidely by region but even in the West, where the regional index is lower, NARrnsaid the typical family is well positioned in most markets.</p

Association President Gary Thomas saidrnthe minor erosion in affordability conditions moving forward could be mitigated</bby bank and regulatory policies.  "Clearer rules from the governmentrnregarding future lawsuits and buybacks of Fannie and Freddie loans couldrnencourage banks to use their massive cash holdings to originate more loans. Arnmore sensible lending environment that makes it easier for other financiallyrnqualified buyers to get a mortgage would allow many more households to enterrnthe market, boosting home sales as much as 10 to 15 percent," Thomas said.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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