The National Association of Realtors (NAR) has a measure called the “Housing Affordability Index,” a gauge for how well the median family’s income can afford a median priced home.
There are a few key assumptions made by the index, such as assuming a 20% down payment, and that 25 percent of the household’s gross income is devoted to principal and interest payments, and that you can get a mortgage at the – you guessed it – median interest rate.
An index of 100 is the point where the median income household has exactly enough income to qualify to purchase the median-priced single family home at that mortgage interest rate. The higher the index, the more purchasing power the family has.
Since the Housing Affordability Index measures purchasing power through monthly payments related to household income, home prices and mortgage interest rates can move the needle, in addition to income.
Although all the data aren’t yet in, NAR expects the Housing Affordability Index to be 194 for 2012, based on all available information. This will be a record number since NAR started tracking the index back in 1970. The Housing Affordability Index was 186 in 2011, by comparison, and also a record at that time.
NAR’s chief economist, Lawrence Yun, points out that home buyers can now stay well within their purchasing power, assuming you can qualify for a mortgage. (Lending standards, while loosening, are still relatively stringent.)
“Although 2012 was highest on record, the excessively tight underwriting precluded many would-be homebuyers from locking-in generational low interest rates,” Yun says.
“Rising home prices and a gradual uptrend in mortgage interest rates will offset improvements in family income, but 2013 likely will be the third best on record in terms of household buying power. A window of opportunity remains open for buyers who can qualify for a mortgage.”
TAKEAWAY: if you’re thinking of selling, this means that we should see a solid influx of buyers this year. If you’re thinking of buying, you have the best purchasing power you’ve had in a generation, so your timing is impeccable!
Laura Kittleman is the owner of The Kittleman Group of Keller Williams Select Realtors, based in Ellicott City, MD. She can be reached at 301-785-5889 or [email protected]
For background on the Housing Affordability Index, check out NAR’s site at www.realtor.org.