One of the often-cited statistics in this space is the Housing Affordability Index. This week, I’ll take a moment to explore what’s behind this term.
There are two components that affect affordability in residential housing: interest rates and home prices. While these factors might move independently, their intersection is a key definer in what a home buyer can or will purchase.
This index measures housing affordability in our region, and a higher number is better for home buyers. An index of 170, for example, means the median household income is 170 percent of what is necessary to qualify for the median-priced home, given current interest rates.
When housing prices increase, as they have for the last several years, affordability decreases.
Home prices in our region began to decline in the fall of 2008, beginning multi-year trend of improving affordability. Prices stabilized in 2012 and have been gradually increasing ever since.
Interest rates are the second contributing factor to affordability, so lower interest rate increase affordability. A buyer can simply buy more when rates are low or declining.
The affordability index reached its pinnacle in our region in early spring of 2013 at 240. This was after three years of declining home values combining with record-low interest rates.
Interest rates for this past week were running 3.5-3.625 percent for FHA loans, while conventional rates were in the 3.87-4.0 percent range. When one considers these rates in comparison to a 30-year trend, you’ll realize why affordability is still very strong in our region, despite steadily rising home values.
The current Housing Affordability Index stands at 170 YTD. This index is down from 190 for the same period in 2016 and 184 in 2015. Looking back to the years prior to the correction, one would find that the affordability index was as low as 130 in 2006 and 2007, when home prices were at their pre-recession peak.
While there has been some decline in affordability with rising prices, stable, low interest rates have worked to counterbalance the trend and keep affordability high today and for the foreseeable future. The is just another reason why now is a good time to invest in real estate in the Greater Chattanooga region!
The Greater Chattanooga Association of Realtors is “The Voice of Real Estate” in Greater Chattanooga. The association is a regional organization with more than 1,700 members and is one of more than 1,400 local boards and associations of Realtors nationwide that comprise the National Association of Realtors. GCAR services Hamilton and Sequatchie counties in southeast Tennessee and Catoosa, Dade and Walker counties in northwest Georgia. Go to www.GCAR.net for more information.