Taking A Closer Look at the Housing Affordability Index

One of the metrics we get the most questions about is the Housing Affordability Index (HAI). HAI is a measure of how affordable a region’s housing is to its consumers. A higher number means greater affordability.

Our version of the index (NAR also compiles an index) is a composite score based on three factors:

• Median sales price
• Prevailing interest rate
• Median household income

The median household income is defined by the U.S. Department of Housing and Urban Development (HUD).

We revised our methodology so the tax burden component of the monthly principal, interest, taxes and insurance (PITI) payment is no longer a flat $2,000/year ($166.667/month) fee, but now amounts to 1 percent of median sales price/year or (.01/12) for the monthly calculation.

While $2,000 per year was a reasonable figure at the time we initially started reporting on the HAI, it was a bit high in low-priced communities and slightly low in higher-priced communities. We used a flat tax assumption so HAI experienced less volatility.

In smaller markets with limited sold data, we didn’t want the index to plummet and then spike just because a single high-priced home sold. We made the change after coming to the conclusion this is less of a factor in the reports that include HAI.

Making Sense of HAI

The most common misinterpretation of the HAI is to assume zero is absolute, or the index maxes out at 100 percent.

For example, an index of 120 means the median household income was 120 percent of what’s necessary to qualify for the median-priced home under prevailing interest rates. Keep in mind the higher the number, the more affordable a market’s housing is.

Sometimes people don’t realize there is more to a market than price. Value and affordability are also key factors in analyzing a region’s housing picture. HAI aims at describing how easily homes can be bought by an area’s inhabitants.

Housing market research is mostly scientific, but creating and maintaining an affordability index is also part art. Some homeowners have liens, assessments or judgments, or may live in special taxing districts that put them in a unique situation. Our HAI utilizes tax burdens as just one component to measure the broader affordability and changes in affordability over time.

Other Details on Methodology

1. Median Sales Price: For most reports, ShowingTime uses the median price of all homes. For those clients that ask us to split properties up for reporting purposes (e.g., single family vs. townhouse-condo), we’ll split up the median prices for HAI purposes. Other indices may use only single-family homes.
2. Interest Rates: We use the national average effective 30-year conventional fixed rate; others may use fixed and adjustable rate mortgages.
3. Data Feeds: ShowingTime uses only MLS-generated sold data.
4. Type of Index: The index covers all property types, all price points, all construction types and all seller types; others may apply more filters.
5. PITI as a Share of Income: Our index assumes a 28 percent housing share of maximum pre-tax family income; we know of other routes (e.g., NAR uses 25 percent and California uses 40 percent).
6. Insurance Component: ShowingTime assumes the insurance burden to be 0.3 percent of the median price annually.
7. Date/Timing: We use the most recent monthly data available; others may rely on quarterly data.

The HAI provides an interesting perspective on the health of the local housing market. Since owning a home is still a big part of the American dream – and the largest financial investment most people will ever make – it makes sense to review it periodically to better understand your own market.

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