Upside to Falling Prices: Housing Affordabilty Index Reaches 4-Year High

by: Mark J. Perry

The chart above shows the National Association of Realtors' Housing Affordability Index [HAI] from 2005 to Feburary 2008 (annual averages for 2005 and 2006, monthly in 2007 and 2008), based on the national median-priced home, median family income, and the 30-year fixed mortgage rate.

The HAI has gone from 103.6 in July 2007 to 135.6 in February 2008. A composite HAI of 135.6 means that a family earning the median family income ($59,967) in February had 135.6% of the income necessary to qualify for a conventional loan (at 5.94%) covering 80% of a median-priced existing single-family home in February ($193,900). This increase of more than 31.6 points in the HAI in just seven months, from both falling home prices and falling mortgage rates, is already starting to have a positive effect on the housing market (February sales increased) and could continue to play an important role in the recovery process for the slumping real estate market.

Housing affordability is higher today than at any time since early 2004. For the perspective of homebuyers, aren't we now in a real estate boom, since affordability is the highest level in four years?