Yes, NAR’s Housing Affordability Index Is Worthless

It’s no surprise that every day is a great day to buy a home if you are talking to most Realtors, but what makes home’s affordable?  That’s a great question considering the sharp increase in home prices we’ve seen this year.  Part of the problem is the definition of “affordable”.  What constitutes affordability for one person might not be relevant for another.  Barry Ritholtz makes an interesting observation today that NAR’s Affordability Index might more appropriately be called an investment index, noting that during the last 10 years of the index there was only ONE month in which the National Association of Realtors deemed houses “unaffordable”.  Who are we kidding here?

1-year

That speaks to some serious flaws in NAR’s calculation of the term “affordable. Here’s how NAR does their calculations:

“Calculation assumes 20% down payment at current mortgage rates assuming a qualifying income ratio of 25% for PI; no assessment of buyer credit worthiness or total DTI or cash on hand.”

It’s interesting that NAR would continue to use such an optimistic standard of qualification considering that over a third of U.S. homeowners with mortgages have little or no equity.  Considering the route in Treasuries we witnessed in the last few weeks, I would also point out that mortgage rates have increased and the “higher incomes” NAR is referencing are not applicable to a large percentage of the population.

For reference, here’s a longer term chart of the HAI courtesy of the St Louis Fed.  If you are interested in statistics on housing affordability in Texas, The Real Estate Center at Texas A&M (TAMU) has affordability statistics on most Texas housing markets going back to 2007.

HAI

 

aaronlaymanYes, NAR’s Housing Affordability Index Is Worthless

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