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.
- 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.
Understanding Affordability Indexes
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 costs 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.
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 touched line of 100 in the late 80s and early 90s, and then again in the housing market meltdown from 2006–2008. Other than those brief periods, however, the Composite Housing Affordability Index has been above 100—and usually well above 100. In April 2019, the Composite Housing Affordability Index sat at 152.3, down from a two year high of 156.6 in Feb. 2019.
Housing affordability, while still above 100, was better for families in the period from 1990–2009 than it has been from 2009–2019. This is interesting as the Housing Price Index has grown almost continuously throughout this period, albeit with a large dip in the 2006–2009 period. Two key factors usually offset this appreciation in housing prices nationally. First, home mortgage 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 growing and this caused the housing affordability index to consequently 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, is beginning to come down from its recent highs.