Home prices have been rising rapidly in most of the United States over the last three years. Inevitably, this gives rise to fears that we are creating a new housing bubble. Aren’t we just creating the conditions for another real estate crash?
It turns out that we actually have a way to measure the health of a real estate market. It’s called “affordability”. Affordability looks at family incomes and interest rates along with home prices to determine if the average family has the means to buy the typical house.
Just as people use a thermometer to monitor their physical well being, affordability is the thermometer we use to take the temperature of a housing market to see if it is healthy or if it is sick. When we use this gauge, we find that real estate markets in most of the country are quite fit.
The National Association of Realtors (NAR) is one organization that tracks housing affordability. They compute a statistic known, appropriately enough, as the Housing Affordability Index (HAI). Here is how it works:
NAR collects info on the median price of single-family homes in 175 large and small metropolitan areas across the country. They also get data from the U. S. Census Bureau on median family income in those same 175 markets. A third piece of data collected is the prevailing interest rate on 30-year fixed rate home loans.
NAR uses this information to determine if the median family has enough income to buy the median priced house.
We won’t bore you with all the gore of how the index is calculated. Just know this: An HAI of 100 means that a family earning the median income has enough money to buy the typical house in their community.
If HAI is 150, the median income family has 50% more income than needed to qualify for the typical single family home. Conversely, with an HAI of 75, the typical family only has 75% of the income needed to buy the average home.
You’re probably already picking up on this, but just to be clear: Bigger is better when it comes to HAI. Higher numbers indicate a healthier market.
For some perspective, HAI ranged between 117.2 and 131.9 during the strong seller markets in real estate in the 1990s. The index struggled to stay at 100 in the years immediately before the recessions starting in 1985 and 2007.
How are we doing at the moment?
On a national scale, the news is good. HAI for the United States as a whole stood at 170.1 at the end of 2014. The typical family has 70.1% more income than needed to buy an ordinary single-family home.
Furthermore, only 7 of the 175 large and small cities around the country tracked in the NAR affordability index have a score of less than 106.
Five of the seven low scoring markets are in California – they are the major metropolitan areas surrounding San Francisco/Oakland (72.6), San Jose/Sunnyvale (70.1), Los Angeles/Long Beach (79.9), Anaheim/Santa Anna (67.8) and San Diego/Carlsbad (80.9).
The other two areas with HAI less than 100 are the New York metro area that includes Wayne and White Plains (73.8) and Honolulu with the worst affordability index in the country at 67.6.
In case you are wondering, the HAI for metro Denver was 146.6 the last time data was released in early 2014. We anticipate Denver will be somewhere in the 130s when updated numbers are available later this month.
Bottom-line: Home prices are rising and housing remains very affordable from an historical perspective. That’s good news all the way around.