State’s Housing Affordability Drops for Consecutive Quarter, Remains Near Record Level, According to UA Center

TUSCALOOSA, Ala. – Housing affordability in Alabama fell for the second consecutive quarter in 2002, according to numbers released by the Alabama Real Estate Research and Education Center at The University of Alabama.

For the first half of the year the Alabama Housing Affordability Index (AHAI) declined from a record setting 186.7 during the fourth quarter of last year to 180.4 as of end of June, a drop of 6.3 percentage points. Despite the decrease in housing affordability, the AHAI is still near record levels, according to Dr. Leonard Zumpano, director of the UA center.

The statewide housing affordability index is calculated as the ratio of the state’s actual median family income to the income needed to purchase and finance the state’s median priced home.

An index number of 100 means that a family earning the state’s median income has just enough buying power to qualify for a mortgage loan on the state’s median priced, single-family home. The higher the index number, the more affordable the housing. In Alabama, during the second quarter, households earning the median income of $46,744 had nearly twice the income needed to qualify for a loan on the purchase of the median priced home.

“The six-month decline in housing affordability can be attributed solely to the increase in home price appreciation that occurred over the past six months, which more than offset the impact of lower mortgage interest rates,” Zumpano said. “The median home price in Alabama, which stood at $99,432 at the end of 2001, increased to $105,839, a 6.44 percent increase over the first six months of 2002, which represents an annualized return of 12.9 percent, should the same rate of appreciation continue through the end of the year.”

Zumpano said the housing situation was much the same at the national level during the second quarter. The U.S. Housing Affordability Index declined from 137.2 in the first quarter to 123.3 during the second quarter of the year. As was the case in Alabama, the explanation is housing price appreciation, according to Zumpano.

“Since the fourth quarter of last year, existing home prices at the national level have increased from $148,033 to $157,667 during the second quarter of 2002. This represents a 6.5 percent increase over the first six months of the year, which is equivalent to a 13 percent annual rate of return,” he said.

Within the state of Alabama, housing affordability declined in eight of the 10 metropolitan areas tracked by the Alabama Real Estate Research and Education Center. “The housing affordability index increased only in Huntsville and Montgomery, the only locations, not coincidently, that also saw a fall in existing home prices during the second quarter,” Zumpano said.

“It is important to point out that we can no longer calculate a housing affordability index for the Decatur Metropolitan Area, since the Huntsville and Decatur multiple listing services combined operations and their real estate listings. This also may explain why the Huntsville metro area reported an increase in housing affordability compared to the previous quarter; since it now includes home prices from the Decatur area, which tend to be lower than in Huntsville.”

Zumpano said residential housing market activity has been very strong for the first half of the year, although there is some recent evidence of slowing sales. “Total sales for the first six months of the year are ahead of last year at this time, and 2001 was a record year. Part of the explanation for the strong housing market performance is the extremely attractive long-term mortgage interest rates. With loan rates continuing to fall, more first time home buyers are able to qualify for mortgage financing, and existing home owners are trading up,” he said.

According to Zumpano, demographic trends, such as the aging of the baby boom generation and the growth in the number of single, female households, also suggest that long-term housing market prospects will remain favorable. He said boomers, who are now moving into their prime earning years, are major candidates for second and vacation homes, as well as more expensive trade-ups. He also pointed out that single, female, heads of households have approximately double the rate of homeownership as their male counterparts.

“There are two possible warning signs on the horizon,” Zumpano said. “First, if housing prices continue to rise and outpace the growth in household income, more and more households will be priced out of the market. Second, the depressed stock market is creating a negative net wealth effect. When household net worth declines, households tend to spend less.

“Since its peak, the stock market has lost almost $7 trillion dollars in value. With most Americans invested, at least to some degree, in the stock market, the slide in share prices is having a depressing effect on consumer spending, including big-ticket items such as housing.

“Fortunately, the increase in home equity values over the past decade has helped offset the loss in stock valuations, as well as helped to support the overall economy.

“Ironically, the fall out in the stock markets may be encouraging some investors to move into real estate and the housing markets. If we are at or near the bottom as far as the stock market is concerned, near-term prospects for the housing markets should improve.”

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.