UA Report: Fourth Quarter Housing Affordability Index a Record

TUSCALOOSA, Ala. — The Alabama Housing Affordability Index (AHAI) reached another record in the fourth quarter of 2002 at 196.6. This surpasses last quarter’s record level of 188.4 (revised) and sets a new annual record affordability level of 186.5, according to the Alabama Real Estate Research and Education Center at The University of Alabama.

The statewide housing affordability index is calculated as the ratio of the state’s actual median family income to the income needed to buy and finance the state’s median priced home. An index of 100 means 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. As the index goes higher, housing becomes more affordable. An HAI of 196.6 means Alabama families earning the statewide median income of $46,744 had nearly twice the income needed to qualify for a loan on the statewide median priced home, which in the fourth quarter was priced at $102,168. Stated differently, families earning the statewide median income could afford to buy a home almost twice as expensive as the state’s median priced existing, single-family home, or $200,898.

“The increase in housing affordability across the state can be attributed almost completely to historically low interest rates,” said Dr. Leonard Zumpano, professor of finance and director of the real estate center. “The median price of a home did fall 1.1 percent from the third quarter to $102,186, but a simultaneous decline in interest rates to an average 6.1 percent accounted for more of the increase in affordability. Falling interest rates can also be credited for the year-over-year increase in affordability,” Zumpano said. He noted that even though home prices grew at a slightly higher pace than income, as tracked by AREREC, a fall in interest rates from 7-plus percent levels in 2001 to the low 6 percent range made homes more affordable than ever in 2002.

The Housing Affordability Index also increased at the national level to 140.8 from 135.3 in the last quarter of 2002, according to the National Association of REALTORS® (NAR). Housing prices and income levels remained relatively unchanged from the third quarter, making the decline in interest rates responsible for the increase in affordability. The median income level, as tracked by NAR, rose less than one percent while home prices fell by less than one percent. Average effective interest rates, on the other hand, fell from 6.41 percent in the third quarter to 6.1 percent in the fourth quarter.

“The housing sector has shown remarkable resilience in the face of the current economic slowdown,” Zumpano said. “One possible warning sign on the horizon, at least at the national level, is the rapid increase in home prices relative to income. Over the last four quarters, the median price of an existing, single family home has increased 9.17 percent, while the median income level has only increased 2.02 percent. Falling interest rates have fueled the rise in home prices because homebuyers can afford higher prices when interest rates are lower. If interest rates gradually begin to increase, as the economy hopefully recovers in 2003, home prices should moderate and rise at about the same rate as income.” Zumpano said the growing federal deficit may also put some upward pressure on interest rates this year, although most experts do not expect more than a half to three-quarter percent increase in mortgage loan rates.

Zumpano said Alabama has not seen the same run-up in home prices relative to income. In fact, he said, the median price for an existing, single family home in the state has risen only 2.77 percent over the last four quarters, while income levels have increased 1.49 percent. While this means that home prices have outpaced income over the last year, due, in large part, to the historically low interest rates in 2002, it is not the same glaring disparity seen in some locations at the national level, Zumpano said. Just as at the national level, however, a gradual increase in interest rates should bring home price appreciation back in line with income growth.

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 for offering a high-quality, cost-effective education.