Home Affordability Hits New Record

Update March 27, 2009: Just released data now shows that the Housing Affordability Indicator has hit a new record high of 173.5 for the month of February, 2009. This indicator has been calculated since 1970. (See December article below for the meaning of this number). It's no surprise that housing affordability continues to dramatically improve given the combination of lower housing prices coupled with low interest rates.


Recent data out from the National Association of Realtors (NAR) shows that their home affordability index (HAI) is at the best levels in more than three decades. The HAI compares nationally median family incomes to median home prices. A value of 100 signifies that a family earning the median income has enough income to qualify for a mortgage on a median-priced home." (The monthly mortgage payment is conservatively figured to not exceed 25 percent of the median monthly family income).

The December 2008 HAI value of 158.8 means that a family earning the median family income has 158.8% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. This represents a substantial improvement in home affordability from the level of 106.1 in 2006. The current reading of 158.8 is the best since the early 1970s and the best ever since the NAR began determining this ratio monthly in 1981. HAI data from the 1970s was calculated annually and in 1973, the HAI averaged 147.8. (It's highest annual average was 154.8 in 1972.)

Financing is more challenging today for some prospective home buyers to get than it was a few years back. Those with weak credit reports or low down payments are finding fewer and more costly mortgage options. From a historic perspective, however, the current lending standards are more the norm with borrowers expected to have sound credit credentials and down payments amounting to at least 10 to 20 percent of the value of a purchased home. What was unusual were the loose lending standards of the past decade or so. 

With home affordability at attractive levels not seen in more than a generation, the question remains if homes offer good value.  A new report from IHS Global Insight suggests that nationally housing prices are now undervalued by about 3.8 percent which is quite a change from the peak of being 24.5 percent overvalued just over two years earlier (in the second quarter of 2006).

IHS examines trends and valuations in home prices in 330 metropolitan areas across the United States. For each metro area, home prices are analyzed in relation to population densities, mortgage rates, local incomes, and historic norms within given metro areas.

IHS' latest report looked at home prices as of the 3rd quarter, 2008. This report found that home prices declined in 73% of the tracked metro areas in the third quarter. The weakest markets were generally found in the Southwest and Southeast.

Only three metro areas now have "extreme overvaluation" given the market's fundamentals. 52 metro areas held this same distinction back in 2005. The three most overvalued areas and the percentage above expected fair value are as follows: Bend OR: 43%, Atlantic City NJ: 43%, St. George UT: 39.7%. Most of the other overvalued areas are concentrated in the Pacific Northwest and portions of Utah.

Home prices are now back in line with market fundamentals thanks largely to price declines. While most areas of the country experienced moderate declines, 29 metro areas, all of which are in California, Florida and Nevada, have experienced price drops of 30+ percent since the market peak of the mid-2000s. Other areas suffering significant declines include Michigan, northeastern Ohio, southern metros from Charlotte, NC to Atlanta, GA and portions of New England.

Metro areas now generally considered undervalued include: southern metros from Mississippi through Texas, and now many metros in California and Florida due to significant price declines of the past two years. The vast majority of the 330 metro areas are now considered fairly valued or undervalued. (Click here for a link to the color-coded maps showing relative valuations and the report).

Even though by historic measures prices are fairly valued or even undervalued already, as the study's authors point out, markets tend to overshoot so of course it's possible that in some areas prices may fall further. That said, history has proven time and time again that if you buy sound real estate at a fair price and hold it for the long-term, you will make solid returns.