Calculating Home Affordability

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Using a Home Affordability Index

Finding an affordable home and an affordable mortgage is a challenge that almost all households face. Circumstances such as rising mortgage rates and low housing inventory make finding and purchasing a home a very challenging task.

Should you keep renting instead of buying? Can you find an affordable home? Is this a good time to sell your house and move up to a bigger homer? Or maybe a Home Equity Loan is an excellent idea to help you improve your current home.

Most Home Affordability Indices look at median housing prices, average interest rates, and average income for a specific area (national vs. regional). A Home Affordability Index is helpful for looking at the general economic situation; however, when it comes to looking for a home and a mortgage, make sure that you analyze your financial situation, including the size of your down payment, your credit, and your debt-to-income ratio.

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The NAR Home Affordability Index

Home affordability is a mixture of a households purchasing power and home prices.

One of the more popular home affordability indices is the National Association of Realtors Home Affordability Index (NAR HAI). Their index takes into consideration median income, median home prices, fixed vs. adjustable rate mortgages, and assumes a 20% down payments. The index checks whether a family has enough income to qualify for a median-priced home, using a 20% down payment, and current mortgage rates.

According to the NAR website:

The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.

Using an estimated mortgage interest and principal payment on a 30-year Fixed Rate Mortgage (FRM) and a 25% debt to income housing expense ratio, a score of 100 shows that an average family has just enough income to qualify for an average (median) priced home,

Based on the NAR HAI national data, housing affordability deteriorated since 2013, when there was a much more abundant supply of homes; however, the index, as of early 2018 was around 160.

 

As can be expected, there are significant differences between regions, both in median income, median home prices, and the Home Affordability Index. For example, the NAR HAI index for January 2018 was highest for the Midwest and lowest for the Pacific area. One can also expect great variances when going from the state level to the metropolitan level.

NAHB/Wells Fargo Home Opportunity Index

The NAHB/Wells Fargo Index (National Association of Home Builders) tracks home affordability based on median home prices, median income, and mortgage interest rates. Their data includes a national index and regionally based indices.

According to the NAHB press release from February 2018, home affordability remained constant during 2017

In all, 59.6 percent of new and existing homes sold between the beginning of October and end of December were affordable to families earning the U.S. median income of $68,000.

To get a better idea of how the mortgage and housing market has changed, here are four graphs, based on data from NAHB/Wells Fargo HOI, that chart the median home price, median income level, 30-Yr. FRM Interest Rate and the Price-to-Income Ratio (vs. the HOI):

Source: https://www.nahb.org/en/research/housing-economics/housing-indexes/housing-opportunity-index.aspx

 

 

Compare Your Home Mortgage Affordability

Looking to purchase a home? Are you wondering how you match up with other home borrowers? Check out BIlls.com Home Affordability Comparison Calculator to see how your home affordability (Price to Income Ratio and debt to income ratio) matches up with national borrowers.

 

Get a Mortgage Quote Now

Looking to buy a home? Find a mortgage that fits your budget and downpayment. Get a purchase mortgage quote now.

Home Affordability Index - Let it Help You Purchase a Home

Before you buy a home and shop for a mortgage, make sure that you understand your financial situation. Mortgage loans are long-term commitments. 

Home prices, mortgage rates, your income and debt situation all crucial factors to consider when purchasing a home and shopping for an affordable mortgage. Know that you know your price to income ratio and how you stack up with the rest of the country, take these steps to find an affordable mortgage:

  • Prepare your budget
  • Learn about mortgage terms and mortgage rates.
  • Know exactly how much you make and how much you spend each month.
  • Control your debt level. Avoid making just minimum payments on your credit cards.
  • Study the housing market.
  • Save for a down payment and don’t overextend yourself.
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