Home Affordability Reaches Record High in 2012


16 January 2013

With 11 months of data in the books, 2012 is shaping up to be a record year for favorable housing conditions and a strong year for buyers, according to the National Associations of Realtors.

As of November, the Housing Affordability Index released by NAR stood at 198.2. This index takes into account the relationship between median home price, median family income and average mortgage interest rate. A higher index indicates a stronger household purchasing power.

When an index hits 100, it is at the point where a median-income family is making enough money to qualify to buy a median-priced single-family home, assuming 20% is put down and a quarter of gross income is devoted to mortgage principal and interest payments.

NAR predicts that once the December numbers are reported, 2012 will hit a record high 194 on the index, up from 186 in 2011, which was the previous record.

“Rising home prices and a gradual uptrend in mortgage interest rates will offset improvements in family income, but 2013 likely will be the third best on record in terms of household buying power,” said Lawrence Yun, chief economist of NAR. “A window of opportunity remains open for buyers who can qualify for a mortgage.”

NAR expects the housing affordability index to average 160 in 2013, meaning a median-income family would need 160% of the income required to purchase a median-priced single-family home.

Gary Thomas, president of NAR, believes the minor erosion in affordability conditions in 2013 could be lightened by bank and regulatory policies.

Thomas says banks could be encouraged to use their massive cash holdings to originate loans if the government begins making clearer rules regarding future lawsuits and buybacks of Fannie and Freddie loans.

“A more sensible lending environment that makes it easier for other financially qualified buyers to get a mortgage would allow many more households to enter the market, boosting home sales as much as 10% to 15%,” Thomas said.