A housing affordability index compares the average house price with the average income to determine if middle-income families can afford a home. The US National Association of Realtors produces a well-known index, but it assumes certain things and does not consider all variables. The index is valuable for a general understanding of the market, but may not be helpful in determining an individual’s ability to buy a home.
A housing affordability index is a way of measuring the likelihood of buying a home for middle-income families. The indices are produced by various agencies in various countries and define affordability by comparing the average house price with the average income, among other factors. From this comparison we therefore obtain a number that suggests how possible it is for a family with an average income to buy a house at an average price. There are some easily detectable oversights in a housing affordability index which means it is not always a reliable predictor of whether a person or family can buy a home.
The National Association of Realtors of the United States produces a well-known housing affordability index, and a brief understanding of it can help monitor trends in the real estate industry. The index lists the median home price and income for the United States, then assigns a current market affordability number for the median income. It assumes certain things, such as that families are able to commit 25% of their salary towards the mortgage payment and that they will be able to put at least 20% down on a house, which is not always the case.
A housing affordability index number of 100 on the US National Association of Realtors index means that middle-income families should be able to afford a middle-priced home. Higher numbers mean it’s still cheaper to buy a home, and families with incomes below the median will qualify to buy the home, provided they have a down payment and can pay a quarter of their salary each month in mortgage payments. The index numbers can also deal with different types of mortgages and show whether homes become more or less affordable with different home loans such as adjustable rate mortgages or fixed interest loans.
For anyone interested in buying a home, it would be great if an Affordability Index number suggested that this is always possible. This is not always the case and the indices do not take many variables into account. First, national assessments of housing markets do not speak of markets where house prices are much more expensive than median prices, so the assessment of median income and house prices can only be applied to some parts of a country and be completely unenforceable elsewhere.
Other things can have a big influence on what is considered convenient. With inflated prices and increases in things like health care costs, it’s not always logical to assume that a family can commit 25% of their income to household payments. Furthermore, since the housing crisis of the early 2000s, loan restrictions have become much stricter and creditworthiness requirements have been significantly increased. This means that even a high number on a housing affordability index and the ability to easily afford the payments is no guarantee that you will be able to get a loan. Ultimately, this metric is valuable for a general understanding of the market, but may not be helpful when it comes to determining an individual’s ability to buy a home.
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