TUSCALOOSA, Ala. – The Alabama Housing Affordability Index was 153.0 for the fourth quarter of 2005, according to the Alabama Real Estate Research and Education Center at The University of Alabama. This represents a decline of 5.7 percentage points from the third quarter.
The AHAI has decreased by 47 percentage points since the record high of 200 set in the first quarter of 2004. It has fallen for three consecutive quarters due to increasing home prices and rising mortgage rates, according to Dr. Leonard Zumpano, director of the center.
The median home price for Alabama has risen by 12 percent from the first quarter of 2005 to $135,063. During the last three quarters of 2005, increases in family income have not been able to compensate for rising home prices, Zumpano said.
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 loan on the state’s median priced, single-family home, assuming standard underwriting criteria. The higher the index number is, the more affordable the housing.
An AHAI of 153.0 means that Alabama families who earn the statewide median income of $48,650 had about 1.5 times the income needed to qualify for a loan to purchase the statewide median priced home. Stated differently, a family earning the statewide median income of $48,650 could have qualified to purchase a home valued at $223,079. It should be noted that the numbers used to compute the HAI reflect mostly urban areas, which have much higher income levels than rural areas in the state, according to Zumpano.
Housing affordability declined in 10 of Alabama’s 11 metropolitan areas, with Baldwin County being the only metropolitan area where affordability slightly increased.
Home prices have been declining in the county over the last few months and have brought the market down to more sustainable levels. In the counties tracked by the research center, housing affordability increased in three of the five non-metro areas; the reason, as was the case in Baldwin County, is declining median home prices.
Although the HAI in Tallapoosa County did increase in the fourth quarter to 93.9, it still remains below 100. Baldwin County’s HAI rose slightly as well but remains close to 100. “The HAI in both Baldwin County and Tallapoosa County must be interpreted with care,” Zumpano said.
“Many of the buyers of the properties that lie along the Gulf in Baldwin County and on Lake Martin in Tallapoosa County are not residents of these two counties, so their incomes are not included in the HAI for these counties,” Zumpano said. “They are usually more affluent than the local residents and have bid up prices in vacation locations over the past few years.”
At the national level, housing affordability declined in three of the last four quarters of 2005. For the last three months of the year, the housing affordability index for the U.S. came in at 114.8. During the fourth quarter, the national median home price decreased to $214,667.
However, rising interest rates offset the decline in home prices, causing housing affordability to fall at the national level. As was the case in Alabama, the U.S. housing affordability has been mostly declining since these indices peaked in the first quarter of 2004. The fourth quarter HAI for the state of Alabama was 26 points lower than the fourth quarter of 2004, and the national HAI was 15 points lower.
“Most economists are calling for more modest growth in home prices during 2006, and the growth in income and employment in Alabama should help bolster the market here,” Zumpano said. “Although long-term interest rates may rise slightly, look for a modest improvement in housing affordability as the state’s economy continues to grow.”
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.
Editors note: Chart accompanies release
Tara Rich, research scholar, contributed to this report.
Contact
Bill Gerdes, UA Business Writer, 205/348-8318, Bgerdes@cba.ua.edu
Source
Dr. Leonard Zumpano, professor of finance, chair of real estate and director, Alabama Real Estate Research and Education Center, 205/348-8988