Alabama Housing Affordability Declines as Economy Enters Second Half of Year, According to UA Real Estate Center

TUSCALOOSA, Ala. – The Alabama Housing Affordability Index for the second quarter was 147.4, down from 165.0 in the first quarter of 2006, a 10.67 percent decline, according to figures released by the Alabama Real Estate Research and Education Center at The University of Alabama’s Culverhouse College of Commerce.

With the exception of the first quarter numbers which, in large part, reflected the increase in income for 2006, the AHAI has been declining since the first quarter of 2004, when the housing affordability index set a record at 200. Rising mortgage interest rates combined with a substantial increase in median home prices explain the decline in housing affordability during the second three months of 2006, according to Dr. Leonard Zumpano, director the center.

Median home prices rose from $129,757 during the first three months of the year to $141,730 in the second quarter, an increase of 9.2 percent in just three months. The composite mortgage interest rate rose by almost a quarter of one percent during the same time period. The result was a significant increase in the monthly payment needed to purchase the median priced home in Alabama, up from $649 in the first quarter to $726 in the second quarter.

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 147.4 means that Alabama families who earn the statewide median income of $51,400 had almost 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 $51,400 could have qualified to purchase a home valued at approximately $209,000, assuming standard underwriting criteria. 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.

Within Alabama, housing affordability declined in all 11 metro areas and in four of the five counties tracked by the Alabama Real Estate Research and Education Center. Housing affordability increased only in Walker County during the second quarter of 2006 due to a drop in the median home price. The only other locations to report a fall in median price were Gadsden and Mobile.

The housing affordability index dropped dramatically in Tallapoosa County, falling below 100. An index number of 66.3 means that county residents earning the median income of $47,100 had only 66 percent of the income needed to qualify for the median priced home in Tallapoosa of $288,667.

Median home prices have almost doubled between the first and second quarters, reflecting the significant increase in prices in the Lake Martin area as many people, frightened by hurricane activity along the Gulf Coast, are seeking out water-front properties or have traded beach homes for lake homes. As is the case in the Baldwin Metro Area, many of the people who have purchased recreational or second home properties in these locations come from other Alabama counties or from out-of-state, and their incomes are not reflected in the housing affordability indices.

Nationally, housing affordability resumed its decline after increasing in the first quarter of the year. The HAI stood at 105.8 for the April through June period, down 7.8 percent from 114.7 posted during the first quarter of 2006.

With the exception of these first quarter results, housing affordability has been declining in the U.S. since 2003. While the increase in home prices has been moderating in many parts of the country, the rapid run up in home prices over the past five years and rising mortgage rates have worked to reduce housing affordability, Zumpano said.

“Rising oil prices are now filtering their way into the general economy, contributing to inflationary pressures while absorbing income that would otherwise be spent on consumer goods, dragging down second quarter GDP in the process,” Zumpano said. “This is a recipe for stagflation. Rising prices may cause the Federal Reserve to continue raising interest rates which would not bode well for the housing market in the coming months.”

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: Chart accompanies