UA’s Real Estate Center Stats Indicate Housing Affordability Sets Record, but is the Party Over?

TUSCALOOSA, Ala. – According to Dr. Leonard Zumpano, the director of the Alabama Real Estate Research and Education Center at The University of Alabama, it is not surprising that the housing market continued its expansion during the first three months of the year.

“The combination of rising income and falling mortgage interest rates worked to make the dream of homeownership a reality for more and more potential homeowners,” Zumpano said. “As witness to this encouraging state of affairs, the Alabama Housing Affordability Index rose to 200.0 in the first quarter of 2004, a new record high. The previous record was set just one year ago, in the first quarter of 2003 when the AHAI hit 197.6.”

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. Higher index numbers indicate more affordable housing.

An HAI of 200 means that Alabama families earning the statewide median income of $47,220 had nearly twice the income needed to qualify for a loan on the statewide median priced home, which in the first quarter was priced at $107,116. Stated differently, a family earning the statewide median income could qualify for and purchase a home valued at $214,232.

The increase in housing affordability at the state level is primarily due to a drop in interest rates during the first quarter, Zumpano said. The median income at the state level rose 0.9 percent to $47,220 while the median home price rose 1.2 percent to $107,116.

Interest rates, on the other hand, Zumpano pointed out, fell from an average effective rate of 5.83 percent in the fourth quarter of 2003 to 5.60 percent in the first quarter of 2004, according to the Federal Housing Finance Board. Income figures for Alabama are median family income as reported by HUD and are only updated in the AHAI in the first quarter of every year.

“Looking at the MSA (Metropolitan Statistical Area) level, it looks like moderating home prices as well as falling interest rates contributed to significant gains in housing affordability,” Zumpano said. “Median home prices fell in seven of the 10 MSA’s while income either rose or remained unchanged. Some softening in home prices in the winter months is expected and is not necessarily an indication of housing market weakness.

“Looking at the county level, however, only one area, Baldwin County, reported a decline in median selling price. Given the large concentration of vacation property in the county, price declines in the winter months are not at all surprising.”

Housing affordability increased at the national level in the first quarter as well. The first quarter HAI rose to 144.8 from 139.2 the previous quarter, according to the National Association of REALTORS®. Once again, falling interest rates were the key. Median income and median home price both changed less than 1 percent, but the average effective interest rate of 5.60 percent was down from the fourth quarter figure of 5.83 percent.

The Commerce Department released a preliminary GDP growth figure at the end of April of 4.2 percent for the first quarter of 2004, slightly lower than the expected 5.0 percent rate. The April employment situation was once again significantly positive. The commerce Department reported that 288,000 non-farm payroll jobs were added in April.

“As one would expect when the economy picks up steam, the Consumer Price Index (CPI) rose 0.5 percent in March and is up 1.7 percent over the last 12 months,” Zumpano said.

Core prices (excluding the volatile energy and food categories) are up 0.4 percent for the month and 1.6 percent over the last 12 months. Zumpano said that while a figure of 1.6 percent is not particularly troubling, the upward movement in prices is beginning to hint at building inflationary pressure. The Commerce Department’s Price Index for Consumer Spending is another popular gauge of inflation.

The PCE increased 3.2 percent in the first quarter of 2004, hinting at much stronger inflation than the CPI. The Chain Price Deflator, yet another gauge of inflation, increased to 2.5 percent in the first quarter. Zumpano said the Federal Reserve last week decided not to adjust short term interest rates, but did indicate a willingness to raise rates if inflationary pressure continues to build.

“A relatively stable employment situation in the state and the historically low interest rates that prevailed during the first quarter of the year continued to buttress the housing sector and helped put affordability at record levels,” Zumpano said. “As the economy continues to recover, look for inflationary pressures to push up mortgage rates and reduce housing affordability in the coming months. So long as incomes and employment continue to rise and the expected increase in mortgage rates is not too severe, the housing market should remain relatively healthy through the remainder of the year.”

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.

Editor’s note: An earlier release, dated March 11, contained some incorrect percentage rates. This release corrects those rates.

Steven Stelk, research assistant, AREREC, The University of Alabama, contributed to this report.