Third Quarter Results Show Some Erosion in Housing Affordability, According to UA’s Real Estate Center

TUSCALOOSA Ala. – The Alabama Housing Affordability Index increased by 2.7 percentage points from the second quarter to the third quarter of 2006, according to the Alabama Real Estate Research and Education Center at The University of Alabama.

In the third quarter, the index increased to 150.1 from 147.4 in the second quarter. An examination of the index components reveals the improvement in the state’s housing affordability index can be attributed to a decline in home prices during the previous three months. The median home price in Alabama was $137,212 for the third quarter, a 3.2 percent decline from the $141,730 recorded in the second quarter, according to the real estate center.

The composite mortgage interest rate rose from 6.63 percent to 6.77 percent during the same period, an increase of only 14 basis points. The average monthly loan payment needed to buy the statewide median priced home fell from $726 to $713 in the third quarter. Because the fall in home prices more than offset the effects of rising mortgage rates, housing affordability rose slightly.

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 Alabama Housing Affordability Index of 150.1 means that Alabama families who earn the statewide median income of $51,400 had 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 $206,000, 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,” according to Dr. Leonard V. Zumpano, director of the center.

While housing affordability improved statewide during the third quarter, this was not true in all the locations tracked by the Real Estate Research Center. Housing affordability declined in eight of the 11 Alabama metropolitan areas and in four of the five counties included in the statewide average Housing Affordability Index. Housing affordability actually increased in only three of the state’s metropolitan areas and in only one of the counties monitored by UA’s Alabama Real Estate Research and Education Center.

A significant decline in home prices in Tallapoosa County, which contains Lake Martin, caused its Housing Affordability Index to increase from a very low 66.3 in the second quarter to 97.6 during last quarter. The median home price in Tallapoosa County dropped from $288,667 in the second quarter to $193,333 during the previous three month period.

“That’s a big drop, but not such a surprising result as we head into the winter months in a resort location,” Zumpano said. Gadsden also recorded a sizeable increase in its Housing Affordability Index during the same period, up from 192.4 to 201.5. In many of the locations where housing affordability fell, the numerical changes were quite small, causing the statewide Housing Affordability Index to increase slightly during the third quarter.

Nationally, housing affordability continued to decline. The Housing Affordability Index was 103.0 for the nation in the third quarter, a decline of 2.6 percent from the second quarter. In effect, households earning the U.S. median income of $57,837 could just barely qualify for the median priced home, which was priced at $225,000 in the third quarter.

Housing affordability at the national level has been declining steadily since 2003, with the exception of the first quarter of 2006. While median home prices actually declined from the second to the third quarter, rising mortgage rates worked to reduce housing affordability.

“Further price erosion at the national level may help stabilize some local markets that experienced rapid rates of price appreciation during the previous three years,” Zumpano said. “If prices continue to soften as we move into 2007 and the Federal Reserve doesn’t move to raise interest rates, housing affordability may begin to improve at the national level. For the near term, however, the housing market remains a buyer’s 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 for offering a high-quality, cost-effective education.

Editor’s note: Chart accompanies article

Tara Rich, research scholar, contributed to this report.