State’s Housing Affordability Index Jumps 6 Points, According to UA’s Real Estate Center

TUSCALOOSA, Ala. – The Alabama Housing Affordability Index rose 6.0 points to 195.7 in the fourth quarter of 2003, according to the Alabama Real Estate Education and Research Center at The University of Alabama.

“The increase in housing affordability in the fourth quarter can be attributed to falling home prices which more than offset the increase in mortgage interest rates that occurred during the last three months of the year,” said Dr. Leonard Zumpano, director of the center.

Zumpano said the median price of a home fell 4.6 percent from the third quarter to $105,798 while the Federal Housing Finance Board reported that the average effective interest rate rose to 5.86 percent from 5.68 percent.

“Home prices tend to soften in the winter months when housing activity slows, so the seasonal decline in home prices is not a big or unexpected concern,” Zumpano said.

According to Zumpano, far more important is how housing affordability in Alabama changed between 2003 and 2002. For the year, the AHAI was a record 194.4, or 8.2 percentage points higher than the annual average of 186.2 in 2002.

“The increase in housing affordability occurred despite a healthy 3.5 percent increase in existing home prices,” Zumpano said. “The primary reason affordability rose was that during 2003 mortgage interest rates fell 75 basis points from 6.51 percent to 5.75 percent at the same time household income rose slightly by one-tenth of 1 percent, not bad for the end of the recession when incomes are typically falling. These changes are reflected in the construction of the housing affordability index.”

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 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 is the housing. An HAI of 195.7 means 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 fourth quarter was priced at $105,798. 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 $207,047.

For the year, only two areas tracked by AREREC experienced a decline in affordability, Monroe and Tallapoosa Counties. Those two areas also reported the largest increases in home prices with Monroe at 11.7 percent and Tallapoosa at 8.5 percent. The greatest increases in housing affordability were reported in Gadsden, Mobile, and Baldwin and Walker counties, all of which reported greater than 10 percent increases in affordability. A combination of falling home prices and increases in income contributed to the increase in affordability in each of these areas.

The Housing Affordability Index also increased at the national level to 139.2 from 136.6 in the last quarter of 2003, according to the National Association of REALTORS® (NAR). Just as at the state level, falling home prices caused the increase in affordability. The median price of an existing, single family home fell 3.0 percent to $171,600. For the year, however, median home prices are up 7.6 percent as compared to the annual average of $160,333 in 2002.

“The housing sector has shown remarkable strength during the past three years of recession, a situation which has fortunately begun to turn around during the last half of the year, Zumpano said. “The rapid increase in home prices relative to the growth in income that has occurred in many locations over the last two years is likely not sustainable. Over the long-term, changes in home prices tend to track changes in inflation and income.”

Over the last four quarters, median income has increased 2 percent, as tracked by NAR, while the Consumer Price Index has risen 1.9 percent from December 2002 to December 2003. Historically low interest rates coupled with a relatively stable employment situation have fueled the rise in home prices because homebuyers can afford higher prices when interest rates are lower.

Moving into 2004, most forecasts are calling for mild increases in interest rates over the next 12 months as the economic recovery continues and the record budget deficit creates some inflationary pressure, Zumpano said. The Mortgage Bankers Association recently said it expects 30-year fixed mortgage rates to reach 6.3 percent by the end of 2004 and 7.1 percent by the end of 2005.

Although the Federal Reserve decided to leave interest rates alone at its most recent meeting, it is no longer promising to continue this policy, according to Zumpano.

Mild increases in mortgage interest rates tempered with an improving employment situation and favorable demographics should continue to push home prices higher, but bring the pace of home price appreciation down to more sustainable levels in 2004, he said.

“Look for a moderate decline in housing affordability as we move through 2004,” Zumpano said.

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.