Housing Affordability Index Remains High Despite Increases in Home Prices and Mortgage Rates

TUSCALOOSA, Ala. -- Despite substantial increases in home prices and rising mortgage loan rates, the statewide housing affordability index barely changed from the fourth quarter of last year, according to the Alabama Real Estate Research and Education Center at The University of Alabama's Culverhouse College of Commerce and Business Administration.

The housing affordability index (AHAI) remains near the record highs recorded during the last decade. During the year's first quarter, the statewide housing affordability index was 162.5, declining by only 1.6 percentage points from the previous quarter. During the same period, the median price of an existing, single family home in Alabama rose by $5,700, a 6 percent increase in only three months.

"This rate of housing appreciation is extraordinary this late in the economic expansion and is indicative of an extremely strong housing market; one that remains affordable because the increases in long term mortgage loan rates have so far remained modest and more than offset by the substantial growth in the state's median family income," said Dr. Leonard Zumpano, director of the Alabama Real Estate Research and Education Center.

"The primary reason housing affordability in Alabama remains so high can be attributed to the substantial increase in median family income. The new income estimates from the U.S. Department of Housing and Urban Development show that statewide median family income for fiscal 2000 increased by slightly more than $3,300 over 1999," Dr. Zumpano said. "For 2000, median income rose to $45,450 from $42,114 in 1999, an increase of almost 8 percent. This is a substantial year-to-year increase in income and reflects the continuing strong Alabama economy. With unemployment at record lows in many of the state's metro areas, rising incomes mean more families and individuals can afford to purchase homes."

Mickey Phillips, 2000 President of the Alabama Association of REALTORS and a realtor with Russell Lands on Lake Martin, commenting on the index, said, "Housing market conditions for sellers and buyers in Alabama continue to be as good as can be hoped for. Homeownership just seems to be important to younger people now.

Existing homeowners are also buying up to larger homes while some new "empty nesters" are moving into smaller homes. As a result, there is a good selection on the market throughout Alabama right now. It's a perfect time to list and buy a home in Alabama."

The Statewide Housing Affordability Index is calculated as the ratio of the state's actual median family income and the family income needed to purchase the median priced home in the state. An index number of 100 means that a family earning the median income has just enough buying power to qualify for a mortgage loan on the median priced, existing single-family house, given standard underwriting criteria.

Higher index numbers indicate more affordable housing. For Alabama, an HAI of 162.5 means that a family earning the state's median income had almost 1.63 times the income needed to purchase the statewide median priced home. Stated differently, a family earning the state's median income of $45,450 could afford to purchase a house valued at $162,000 given a 20 percent down payment and a mortgage interest rate of 7.94 percent. In the second quarter, the statewide median priced home was only $99,805. Given the HAI of 163, more than half the families and individuals in Alabama can afford to purchase larger and more expensive homes.

In contrast to Alabama, the US Housing Affordability Index actually increased slightly during the second quarter, up almost 1.4 percentage points. At the national level, existing home prices remained virtually unchanged over the last 6 months, reflecting a possible slow down in the housing market, at least in some parts of the country.

Within Alabama, housing affordability increased in 6 of the state's 11 metro areas. Huntsville had the highest HAI of the four largest metro areas, reflecting the fact that Huntsville also has the highest median family income at $58,100. Almost all the other metro areas in the state reported income gains between 6 and 7 percent. Among the counties included in the housing affordability index, Tallapoosa and Monroe Counties registered substantial increases in family income, up 9.4 percent and 9.2 percent respectively. These numbers suggest that the strong economy is not confined to just the metro areas within the state.

During the first quarter of the new century, mortgage interest rates rose almost 30 basis points, a little over a quarter percentage point. Mortgage loan rates have steadily risen during the last 3 quarters, reflecting the continuing credit tightening by the Federal Reserve.

In Alabama the existing housing market remains surprisingly robust ‚ despite five interest rate increases ‚ with total homes sales up from last month and ahead of last year at the same time. "Although we expect the housing market to remain strong, we do not anticipate reaching the same sales levels that were attained in 1999," Dr. Zumpano said. "The Federal Reserve has signaled that it intends to continue raising short term interest rates to slow the economy and preempt future inflationary pressures. How much the Fed tightens credit in the months ahead will, in large part, determine how the existing housing markets will fare for the remainder of the year."

The Alabama Real Estate Research and Education Center is part of The University of Alabama's Culverhouse College of Commerce and Business Administration. The UA business school, founded in 1919, has been recognized repeatedly during the 1990s for offering a high-quality, cost-effective education.