Affordability Index

What Is 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.

Understanding Affordability Index

Affordability 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 baseline 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 of a given region or area.

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, using the costs of a specified group of goods and services to allow for comparison on a city-by-city basis.

Affordability Index Example

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.

According to the NAR's historical data, it is clear that 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 NAR 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, preceding the housing market meltdown that triggered the Great Recession. Other than during those brief periods, however, the index has usually been well above 100. In February 2021, the index sat at 173.1, considerably up from its 2019 reading of 159.5 and also above 2020’s score of 170.8.

This has changed, however, more recently. As housing prices, inflation, and interest rates have risen into 2022, the housing affordability index has dropped below 100 for the first time in decades, with a reading of 98.5 recorded in June 2022.

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 repay 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, 63% of Whites, and 71% of Asians.

Due to differences in income and financing needs, creditworthiness also varies. In 2020, 7% of Black and Latinx homebuyers were denied mortgages, as opposed to only 4% of White and 3% of Asian ones. One explanation is that Blacks families tend to have a lower median income ($82,300) than White families ($101,900), as well as a lower average net worth ($188,200 for a typical White family versus $24,100 for a Black one).

These differences in affordability and its determinants unsurprisingly lead to differences in homeownership. The homeownership rate for White families was 72.1%, compared with 43.4% for Black families, 51.1 % for Latinx families, and 61.7% for Asian families. Of course, because states with few Black people will tend to have few Black homebuyers: North Dakota (9%), South Dakota (13%), and Montana (16%) had the lowest homeownership rates among Blacks.