Increased Affordability of Homes Amidst the U.S. Real Estate Downturn

Chart of the Week for March 13 - March 19, 2009

Much of the news emanating from the U.S. residential real estate market has been bleak over the last 18-24 months: falling asset values, rising inventory, and decreased home sales. However, these negative factors have combined to help push housing affordability, as measured by the National Association of Realtors’ (NAR) Homebuyer Affordability Index, to an all-time high. Coupled with recently passed housing stimulus legislation, this increased affordability may induce would-be buyers to enter the real estate market, in spite of the weakened economy and increased unemployment.

NAR’s Homebuyer Affordability Index was established to gauge the financial ability of consumers to buy a home. The index is a reflection of three main factors: housing prices, effective interest rates for loans closed on existing homes, and national median family income. An index level of 100 means a family earning the national median family income, as reported by the Census Bureau, exactly qualifies for a mortgage on a typical median-priced existing single-family home. An index level above 100 signifies that a family earning the median income more than qualifies for a mortgage loan on a median-priced home. Therefore, an increase in the Homebuyer Affordability Index would imply that a family is more able to afford a median priced home.

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