What is the affordability index and why should I care?

unnamedEvery month since 1970, the National Association of Realtors (NAR) puts out the Housing Affordability Index (HAI), which is pretty much what it sounds like: how affordable buying a median-priced house is to a family of median income. The HAI uses housing prices, mortgage interest rates, and median income to rate affordability on a numeric scale.

A rating of 100 means that a typical family will qualify for a loan that allows them to buy a typical home, assuming a 20 percent down payment and that principal and interest payments are one quarter of the total family income. Since 2013, the average rating has been near 165.

Why should I care?
This index tells you whether a typical family can qualify to purchase a mortgage for a typical home – and whether you’re buying or selling that’s pretty important.

As a buyer, the HAI helps you keep an eye on the housing market in a relatively straightforward, simplified way. When the index rises above 100 more people can afford to buy a new home. In July of this year, the HAI was 160.6, which means that the typical family made 160.6 percent of the income needed to qualify for a mortgage to purchase a median-priced home.

For you this indicates several things, if your income is near the median as reported on NAR’s HAI:
You will most likely qualify for a loan.
You can calculate a quarter of your yearly income to help determine approximately how much you want to spend.
Lots of other people also qualify, so housing could get more expensive and less available very soon.
As a seller this means that more people are able to afford your asking price and, if you’re in a tight market with few desirable homes available, you may even be able to receive more than your asking price or spark a bidding war.

The Bottom line
Basically, homes are very affordable right now; despite rises in home prices, low mortgage rates keep the affordability index high. If you want to become a homeowner, now is the time to make your move, before mortgage rates rise. Sellers will have a chance to maximize their profit in low-inventory areas.

Whatever your circumstances, I’m here to help. I can review your finances to see if you are positioned to get the most out of today’s housing market. I look forward to assisting you!

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