State Housing Affordability Index Falls 5.1 Points in Third Quarter, According to UA Center’s Statistics

TUSCALOOSA, Ala. – The Alabama Housing Affordability Index fell 5.1 points in the third quarter to189.7, according to figures released by The University of Alabama’s Real Estate Research and Education Center. But despite the second consecutive fall in the AHAI, affordability levels remain near record highs in the state.

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 number 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. Higher index numbers reflect more affordable housing.

An index of 189.7 means that Alabama families earning the statewide median income of $46,794 had nearly twice the income needed to qualify for a loan on the statewide median priced home, which in the third quarter was priced at $110,949. Stated differently, a family earning the statewide median income could qualify for and buy a home valued at $210,470.

The decline in affordability is the result of both home price appreciation and a recent climb in interest rates, according to Dr. Leonard Zumpano, director of the UA real estate center. The median home price in the areas tracked by AREREC increased only 1.79 percent to $110,949 from the second quarter. The average effective interest rate, however, rose to 5.68 percent from 5.60 percent, according to the National Housing Finance Board. The increase in interest rates, coupled with the slight rise in median prices, caused the statewide average monthly payment to increase 2.59 percent, a higher increase than the mild rise in home pries would suggest, Zumpano said.

The largest changes in housing affordability occurred in Marshall and Walker counties, both of which experienced substantial declines in affordability; and Cullman County, which reported a large increase in affordability from the second quarter. Not surprisingly, these counties also reported the largest changes in median home prices from the second to the third quarter, Zumpano said.

The Housing Affordability Index at the national level also fell in the third quarter to 136.2, according to the National Association of REALTORS® (NAR). The median home price rose 4.87 percent to $177,133, while the median family income rose less than 1 percent to $53,641. The rise in interest rates had much the same effect at the national level as it did at the state level.

While the median family income remained relatively unchanged, the 4.87 percent increase in the median home price, coupled with the rise in the average effective interest rate, caused monthly payments to jump 6.07 percent in one quarter, which in turn dragged down the HAI.

Despite the recent increase, historically low interest rates continue to keep housing affordable at the state and national levels, according to Zumpano.

“Although rates have begun to creep up recently, homebuyers have not been too discouraged by the moderate decline in affordability,” Zumpano said. “With a rebounding economy, income levels will rise and the employment situation should continue to improve. On the other hand, an improving economy will also push long-term interest rates up, as has been the case in recent months. Moderate increases in interest rates may continue to pull affordability and home sales down from recent record highs, but 2003 still looks to be a record setting year for the housing market.”

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.