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, or to afford the general cost of living in the region. This type of index typically compares the price of a good or the general cost of living in a region to that of other regions or to some measure of personal income. The resulting number may be presented as a raw ratio or normalized to a given index number. Affordability indexes can give an idea of the standard of living or attractiveness to movers of a given region or area.
- Affordability indexes measure a person’s ability to afford an item, compared to their income or the average income for their country or region.
- One particularly well-known affordability index is the NAR composite Housing Affordability Index.
- Housing affordability varies by race according to income and other factors that impact mortgage approvals.
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. Because 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, taking a basket of goods and service costs to allow for comparison on a city-by-city basis.
Housing affordability tends to fall during periods when real estate booms drive prices up faster than incomes do, which sometimes precipitates a market bust.
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.
This 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 more likely to be affordable and values below 100 indicating that an item is less affordable. Points below 100 indicate that a median 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 exactly enough income to qualify.
Looking at the data, it is clear that according to the Index, housing in the United States has mostly been affordable—as defined by a score of 100 or more—for a very long time. Major dips in the Index tend to coincide with periods of overheated housing markets as home prices on the market outpace incomes, often followed by severe financial crises. This can be seen in the period of the late 1970s and early 1980s, during which the real estate boom that preceded the S&L crisis took off. A second dip toward 100 came from 2005 to 2007, prefiguring the housing market meltdown that triggered the Great Recession. Other than during those brief periods, however, the Index has been well above 100. In February 2021, the Index sat at 173.1, considerably up from the Index for 2019 of 159.5 and also above 2020’s score of 170.8.
Housing affordability as measured by the Index has been better in the past decade than ever in the history of the available data. This is in part because a large dip from the 2006 to 2012 period of the Housing Price Index and rapid growth in incomes since the Great Recession had made housing significantly more affordable. Since 2010, median income has recovered and begun to grow again, pushing the composite Housing Affordability Index to historically high levels. Figures for 2020 median income have not yet been released, but the economic impact of the COVID-19 pandemic may result in a setback as home prices have continued to rise.
Housing Affordability and Race
As a record of objective measures of incomes relative to mortgage approvals, NAR’s regularly published Index doesn’t take race into account.
However, NAR’s 2021 Snapshot of Race and Home Buying in America study provides an adjustment matrix for the Index, showing that housing affordability does vary depending on whether you are White, Black, Latinx, or Asian. This is because incomes and other factors that determine the ability to perform on a mortgage also vary. According to the study, 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.
Due to differences in income and financing needs, creditworthiness also varies. In 2019, 10% of Black homebuyers were denied mortgages, as opposed to 6% of Latinx buyers and only 4% of White or Asian ones. One likely explanation is that Blacks were more likely to have to finance a home purchase (81%) than Whites (76%) were, amid having a distinctly lower median income (nearly $70,000) than Whites ($90,000), as well as a lower average net worth ($188,200 for a typical White family versus $24,100 for a Black one) than Whites do.
These differences in affordability and its determinants unsurprisingly lead to differences in homeownership. 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. Of course, because states with few Black people will tend to have few Black homebuyers, one eye-catching 2019 statistic showed that in five states—Idaho, New Mexico, North Dakota, Vermont, and Wyoming—there were no Black homebuyers at all.