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A housing affordability index is one way to measure likelihood of home purchase for families with a median income. Indices are produced by various agencies in various countries and define affordability by comparing median price of homes against median income, along with other factors. This comparison then derives a number suggesting how possible it is for a family with a median income to buy a median priced home. There are some easily noted oversights in a housing affordability index that mean it is not always a reliable predictor for whether a person or family can make a home purchase.
The US National Association of Realtors produces one well-known housing affordability index, and a brief understanding of it can help track trends in real estate. The index lists median home price and income for the US, and then assigns an affordability number to the present market for the median income. It assumes certain things, like that families are able to commit 25% of their salary to mortgage payments and that they will be able to place at least 20% down on a home, which isn’t always the case.
A housing affordability index number of 100 in the US National Association of Realtors index means median income families should be able to afford a median priced home. Higher numbers mean that it is even more affordable to buy a house, and families with lower than the median income will qualify for home purchase, provided they have a down payment and can pay a quarter of their salary each month in mortgage payments. Index numbers may also deal with different types of mortgages and show whether homes become more or less affordable with different home loans like adjustable rate mortgages or fixed interest loans.
For anyone interested in buying a home, it would be great if a housing affordability index number suggested this was always possible. This isn’t always the case and indices don’t account for many variables. First, national evaluations of housing markets don’t speak to markets where home prices are much more expensive than median prices, so evaluating median income and home prices may only apply to some parts of a country and be completely inapplicable elsewhere.
Other things may have great influence on what is considered affordable. With inflated prices and rises in things like health care costs, it’s not always logical to assume that a family can commit 25% of its income to home payments. Moreover, since the housing crisis of the early 2000s, lending restrictions have become much more severe and requirements for credit worthiness have been raised significantly. This means that even a high number on a housing affordability index and ability to easily afford payments is no guarantee of being able to obtain a loan. In the end, this measurement is valuable for a general sense of the market, but may not be useful when it comes to determining individual ability to make a home purchase.