How is the housing affordability index calculated?
Housing affordability is an important issue, especially in many urban
areas of the West where median housing prices are far above median housing
prices nationally. At the end of 2003, the nation recorded a surge in
the pace of home price appreciation; fourth quarter 2003 home prices
rose at their fastest pace since 1979, a factor that tends to reduce
housing affordability. Still, two commonly used housing affordability
indexes indicate that housing remained relatively affordable in 2003.
The first is the composite Housing Affordability Index (HAI) published
monthly by the National Association of Realtors (NAR). This index measures
median household income relative to the income needed to purchase a median-priced
house. The second measure is the California Housing Affordability Index.
Published monthly by the California Association of Realtors (CAR), this
index tracks the percentage of California and national households that
can afford to purchase a median-priced house.
Two key factors offset the appreciation in housing prices in recent
years and contributed to the continued high level of affordability nationally.
Most important, home mortgage rates were near their lowest level in decades
at the end of 2003, and low rates kept the cost of home ownership low.
In addition, over most of the past decade, annual increases in median
family incomes have tended to outpace increases in home prices. Let’s
examine the HAI index in more detail.
What is the HAI index?
This monthly housing affordability index provides a way to track over
time whether housing is becoming more or less affordable for the typical
household. The HAI incorporates changes in key variables affecting
affordability: housing prices, interest rates, and income.1
The HAI index has a value of 100 when the median-income family has sufficient
income to purchase a median-priced existing home. A higher index number
indicates that more households can afford to purchase a home. In December
2003, the composite HAI for the nation was 137.2, indicating that the
typical household had 137.2 percent of the income necessary to purchase
the typical home:
HAI = ( Median Family Income / Qualifying Income ) * 100
137.2 = ($54,115 / $39,456) * 100
Qualifying income is derived from the monthly payment on the median-priced
existing home, at the effective mortgage interest rate. The HAI assumes
borrowers make a 20 percent down payment and that the maximum mortgage
payment is 25 percent of gross monthly income for the household.2
What does the ratio tell us?
A higher HAI ratio indicates relatively more affordability. A ratio of 100
indicates that median- family income is just sufficient to purchase the median-priced
home. When the ratio falls below 100, as it did during the late-1970s and through
the mid-1980s (illustrated in Chart 1), the typical household has less income
than necessary to purchase the typical house. During the late-1970s through
the mid-1980s, housing was relatively unaffordable. Ratios above 100 indicate
that the typical household has more income than necessary to purchase the typical
house. Over the ten-year period ending in 2003, the HAI shows that housing
was relatively affordable nationally. The HAI averaged around 134 during the
period, indicating that the typical household income was about 34 percent above
the income necessary to qualify for the typical home.
What has been driving affordability?
Opposing trends have been at work on housing affordability. Most important,
the effective (includes interest and fees) mortgage rate (shown as
the thin blue line in Chart 2—the interest rate scale is to the
right on the chart) has declined, especially since 2000. Lower mortgage
costs make housing relatively more affordable, and mortgage rates since
1993 have averaged less than 8 percent on an annual basis. The HAI
is shown as the heavier red line in Chart 2.
A second factor improving affordability occurs when median income rises.
At least until the 2001 recession, income had been rising at a rapid
pace. This is illustrated in Chart 3; the median income of households
is shown as the heavy red line in Chart 3—the annual median household
income scale is shown in red on the left.
Offsetting some of the positive long-term impacts of falling mortgage
rates and rising household income is the surge in housing price appreciation
after 1999. Median housing prices (shown as the thin blue line in Chart
3—with annual prices on the right scale), have risen throughout
the 11-year period shown in Chart 3. However, since 2000 housing prices
have been rising at an even faster pace than income; rising housing prices
tend to reduce affordability.
Another way to measure affordability
Another popular way to measure housing affordability is illustrated by
the Housing Affordability series published by the California Association
of Realtors (CAR) and available on their web
The CAR measure of housing affordability tracks the percentage of the
national and California households that can afford to buy a median-priced
house. In its December 2003 Trends in California Real Estate publication,
CAR reported that only 57 and 23 percent, respectively, of the nation
and California’s households could afford to purchase a median-priced
In this case, the major difference in affordability in December 2003
between the nation and California was housing prices; the median home
price in California was $404,520, more than twice the national median
home price of $173,200.
Calculating the National Association of Realtors
Housing Affordability Index,
California Association of Realtors. http://www.car.org/
National Association of Realtors. Economics and Research Division. http://www.realtor.org/research.nsf/pages/HousingInx?OpenDocument
“Trends in California Real Estate.” California
Association of Realtors, Volume 25, Number 2, February 2004.