About this Reference Document This document helps you understand and interpret a particular economic indicator that is part of the larger Outlook for the Texas Economy. Note that all data, charts, and explanations presented are from prior reports and thus are not current. Your feedback is always appreciated. Send comments and suggestions to [email protected]. Dr. Luis Torres and Wayne Day Affordability Index (Index)
Source: Real Estate Center at Texas A&M University Housing affordability refers to the capacity to purchase a house. The affordability index reflects a median-­‐income family’s ability to purchase the median-­‐priced, existing house in their area using standard conventional financing terms. A ratio of exactly 1.0 indicates that the median-­‐
family income is exactly equal to the income a conventional lender would require for the family to purchase the median-­‐priced house. A ratio of less than 1.0 means that a median-­‐income family has insufficient income to qualify for the loan to purchase the median-­‐price house. A ratio greater than 1.0 indicates that a median-­‐income family earns more than enough to buy the median-­‐priced house. In first quarter 2005, the Real Estate Center at Texas A&M University revised its calculation of the Texas Housing Affordability Index to be more consistent with other published indices and reduced the complexity and subjectivity of the analysis that goes into the computations. The first major change was to include the annual median family income estimate provided by the Department of Housing and Urban Development (HUD) to compute each quarter’s index. The second major adjustment was the elimination of local property taxes and homeownership insurance for each locale. The third major change was to use the effective rate reported by the Federal Housing Finance Board (FHFB) monthly survey of rates and terms on conventional, single-­‐family nonfarm mortgage loans for selected metropolitan areas. Dramatic differences may exist between two area indices. Care must be taken in making such comparisons because the data used to make the estimates may not be comparable. For example, local lending practices may be different. Family income distribution may vary, or any number of other influences may not be included. While index values give an indication of affordability, the index should not be relied upon as the sole measure. The U.S. and Texas affordability indexes, after reaching their highest value in the fourth quarter 2011, dropped consistently until second quarter 2014. Helped by low inventories, home prices started to rebound and regain momentum after falling during the Great Recession. In addition, family income has grown at a relatively slower rate since the financial crisis. Still, home affordability was above pre-­‐crisis levels thanks to the impact of historical low interest rates. After second quarter 2014, the index seems to have ended its slide. In this regard, home prices have moved more in line with historical norms relative to income in the presence of tighter mortgage credit. The U.S. and Texas affordability indexes indicate homeownership nationally and regionally remains affordable. Source: Real Estate Center Texas A&M University http://www.recenter.tamu.edu/pdf/1742.pdf http://www.recenter.tamu.edu/data/hs/