Housing affordability may be at an all time high according to the quarterly Housing Affordability Index for the first quarter of 2012. The index, issued this morning by the National Association of Realtors® (NAR), hit 205.9, the first time it has broken through 200 since recordkeeping began in 1970. The companion index measuring the ability of first-time buyers to purchase a home also set a record at 135.8.
The index gauges the purchasing power of a household given the relationship between median home price, median family income, and the average mortgage interest rate. The higher the index, the greater the household purchasing power.
The index assumes, at an interest rate of 4.18 percent, the median income family, earning just under $61,000 could afford a home costing $325,500 in the first quarter. This is more than twice the national median price for an existing single-family home, $158,100. The median monthly mortgage principal and interest payment on that median priced home would be $617, only 13.5 percent of gross income.
NAR President Moe Veissi said market conditions are optimal for home buyers. "For those with good credit, we've never seen better housing affordability conditions or market opportunities than we see at present. Although home prices are stabilizing and sales are rising, some buyers still have to jump through a lot of hoops to convince a lender that they are creditworthy, even for a mortgage that would be well within their means. This is especially true for self-employed buyers."
Assumptions for the first-time buyer index include an income of 65 percent of median family income ($39,632), a starter home costing 85 percent of the median price ($134,400), and a downpayment of 10 percent. This index means the typical entry-level buyer could afford a home costing $182,500, which is well above the overall median price. Most first-time buyers choose a loan with a lower downpayment, often an FHA-insured loan with 3.5 percent down, and some use the VA program with no downpayment. The equation also factors in the cost of private mortgage insurance.
Both home prices and mortgage interest rates are expected to edge up modestly as the year progresses, but housing affordability will remain very favorable with the median-income household well positioned to afford a median-priced home. For all of 2012 the index is projected to set an annual record, averaging 191 for the year.