Affordability Index shows decline

Housing affordability suffered a decline in the second quarter of this year as rising home prices and higher interest rates offset increases in family income.

The National Association of Realtors' most recent Housing Affordability Index was at 126.5 during the second quarter, down 4.6 percentage points from the 131.1 reported in the first quarter and 12.7 points below the second quarter 1999 index of 139.2.

The 126.5 index measurement indicates that half the nation's households had at least 126.5 percent of the income needed to purchase a home at the median existing home price 800 in the second quarter, according to a press release from the NAR.

The index measures affordability factors for all home buyers making a 20 percent downpayment, with an index of 100 defined as the point where a median-income family has the exact amount of income needed to purchase a median-priced existing home.

"The Housing Affordability Index is at the lowest level since the second quarter of 1992, when it stood at 123.7, but any index over 100 is relatively good. For example, a family earning the U.S. median income of just over $50,000 can afford a home costing $174,300 well above the national median existing-home price," NAR President Dennis R. Cronk said in the release.

According to NAR Senior Vice President and Chief Economist Dr. David Lereah, the real issue is affordability for first-time home buyers.

"Higher interest rates mean more people who are at the margins of qualifying for a loan are being priced out of the market," Lereah stated. "For every percentage point increase in interest rates, about 250,000 families are priced out of the housing market."

The NAR cites Federal Housing Finance Board figures which show the average effective mortgage interest rate for existing homes was 8.19 percent during the second quarter; up from 8.02 percent in the first quarter. This was more than a percentage point higher than the 7.13 percent recorded in the second quarter of 1999. This is a weighted average interest rate between fixed and adjustable loans, including the cost of points, and represents a bottom-line mortgage cost.

At the same time, the NAR's First-Time Homebuyer Affordability Index dropped 2.9 percentage points to 75.8 in the second quarter, the lowest reading since the third quarter of 1991 when it stood at 75.5.

This indicates that a typical first-time buyer household, age 25 to 44, had 75.8 percent of the income needed to purchase a typical starter home, which cost $117,100, during the second quarter.

The typical first-time buyer, earning $29,337, could afford a home costing $88,800, during the second quarter.