What Is an Affordability Index?

An affordability index is a measure of an average person’s ability to purchase a particular item, such as a house, in a particular region. An affordability index uses the value of 100 to represent the position of someone earning a population’s median income, with values above 100 indicating that an item is less likely to be affordable and values below 100 indicating that an item is more affordable.

Key Takeaways

  • Affordability indexes measure a person’s ability to afford an item, assuming they are earning the median family income for their country or region.
  • The most common affordability indexes focus on housing, as this is seen as a proxy for the overall costs for living in an area.
  • Cost-of-living indexes are affordability indexes with a wider range of data points to allow for deeper comparisons when housing affordability is nearly even.
  • Race has an impact on housing affordability.

Understanding an Affordability Index

An affordability index is most often associated with housing costs. Housing affordability indexes often compare the cost of purchasing a home in different locations. Points above 100 indicate that a typical family may struggle to qualify for a mortgage on a home in the area, while a value of 100 indicates that the typical family has more than enough money to qualify.

As housing is often one of the largest expenses a family faces, a housing affordability index is seen as an overall indication of the cost of living in that area. However, there are more-detailed indexes that can be used between areas that have nearly equivalent housing affordability index readings. A cost-of-living index goes far deeper than housing, instead taking a basket of goods and service costs to allow for comparison on a city-by-city basis.

Historically low mortgage rates have not been enough to offset appreciation in housing prices, causing the housing affordability index to remain high.

Analyzing the U.S. Housing Affordability Index

There are a number of housing affordability indexes, but one of the most watched in the United States is the Composite Housing Affordability Index. This index is published monthly by the National Association of Realtors (NAR). It measures median household income relative to the income needed to purchase a median-priced house.

Looking at the data, it is clear that housing in the United States has not been affordable—as defined by a score of 100—in a very long time. The index hasn’t been below 100 since 1985, when it was 94.8, and it was within 10 points of 100 only from 1986 to 1991. A second dip toward 100 came from 2005 to 2007, prefiguring the housing market meltdown that triggered the Great Recession. Other than those brief periods, however, the Composite Housing Affordability Index has been well above 100, hitting a high of 196.5 in 2012. In November 2020 the Composite Housing Affordability Index sat at 168.2, considerably up from the index for 2018 of 146.3 and also above 2019’s score of 159.5.

Housing affordability, while still above 100, was better for families in the period from 1990 to 2008 than it has been from 2009 to 2020. This is interesting, as the Housing Price Index has grown almost continuously throughout this period, albeit with a large dip in the 2006 to 2012 period. Two key factors usually offset this appreciation in housing prices nationally. First, home mortgages have been at or near historic lows since the 1990s. These low rates keep the cost of home ownership low, but they also contribute to appreciation. However, the mortgage rate advantage has stalled in the past because of the second factor, growth in median family income. Between 2008 and 2014, median income dropped rather than grew, and this caused the housing affordability index to spike further above 100.

The major takeaway is that, in the absence of growth in median income, low mortgage rates are not enough to offset the appreciation in housing prices. Since 2014 median income has recovered and begun to grow again, so the Composite Housing Affordability Index for the United States, while still historically high, has come down somewhat from its recent highs. Figures for 2020 median income have not yet been released, but the economic impact of the COVID-19 pandemic will probably result in a setback for its recent growth and thus a higher index score.

Housing Affordability and Race

The NAR’s composite housing affordability index doesn’t take race into account, nor did several other housing affordability indexes we looked at. Nevertheless, housing affordability does vary depending on whether you are White, Black, Latinx, or Asian. NAR’s study “2021 Snapshot of Race and Home Buying in America” offers some illuminating figures. For example, in 2019 the net worth of a typical White family ($188,200) was eight times that of a Black one ($24,100). The homeownership rate for White families was 69.8%, compared with 42.0% for Black families, 48.1 % for Latinx families, and 60.7% for Asian families. The median existing-home price as of December 2020 was $309,800. Using nationwide figures, only 43% of Black Americans could afford that amount, compared with 54% of Latinx people, 64% of Whites, and 71% of Asians.

It’s also harder for some groups to get a mortgage than others. In 2019 10% of Black home buyers were denied mortgages, as opposed to 6% of Latinx buyers and only 4% of White or Asian ones. Nevertheless, Blacks were more likely to have to finance a home purchase (81%) than Whites (76%) while having a distinctly lower median income (nearly $70,000) than Whites ($90,000). Of course, housing prices and availability vary by state, and one eye-catching statistic showed that in 2019 in five states—Idaho, New Mexico, North Dakota, Vermont, and Wyoming—there were no Black home buyers at all.