Home Affordability Increases Despite Rising Home Prices

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

According to the latest statistics released concerning Existing Home Sales, family home prices have risen six-consecutive months to levels above last year’s data, largely affecting home affordability and surprisingly making home purchase more realistic.

Published in late September, the August Existing Home Sales demonstrated a noticeable increase in home prices compared with a year ago, illustrating a 10.2 % increase for the sales of median priced single-family homes. While potential buyers may not be entirely pleased with these increases, homeowners can expect a rise in home equity, with at least the promise of value stability.

However, homebuyers may not be necessarily disadvantaged by these home price increases; according to the Home Affordability Index, national median home prices have proven to be more affordable for buyers within the median-income family range as of August 2012 when compared with August 2011, despite higher home values.

Essentially, this conclusion is the result of the effects of the historically low mortgage rates currently available. Although prices have increased, mortgage rates have declined nearly a percentage point from last year’s rates; combined with higher average incomes, home affordability has progressed considerably. In fact, as a result of data taken from the American Community Survey, 2011 income has been upwardly revised with a slight rise in the National Association of Realtors’ (NAR) estimates for 2012. According to these statistics, nominal family income had increased by 1.4% from 2010 to 2011.

 As the Housing Affordability Index calculates not only housing prices but also income and mortgage rates, the median priced home has become more affordable to the median income family than it was last year. Reaching a 185.0, the Housing Affordability Index illustrates that the median family makes 85% more income than is necessary to purchase the average home sold in August. Assessing this data at a regional level, affordability has increased across the board since a year ago in every area with the exception of the West, in which more than 15% price increases have counteracted the income increases and the benefits of the historically low interest rates. However, even in the west, the median family makes at minimum 405 more than is necessary to qualify for a home mortgage for a median priced existing home.

The Housing Affordability Index estimation calculates this data with the assumption of a 20% down payment, as well as a 25% qualifying ratio of principle and interest payment to income. However, home affordability may be at even greater levels considering that FHA loans, or loans insured by the Federal Housing Administration, require a down payment of only 3.5%.