Industry Study

Industry Study

The Housing Affordability Index Is Rising But It Doesn’t Tell The Whole Story

If you go by the National Association of Realtors’ Housing Affordability Index (HAI), buying a home hasn’t been so affordable since 20131.

The Housing Affordability Index (HAI) is probably the most-widely-quoted metric for housing affordability. According to the NAR, “The Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home under current underwriting standards.2

A rising Housing Affordability Index should mean that buying a home is easier for the typical family. But then why does it feel like buying a home now is anything but affordable?

Let’s look at four reasons why the Housing Affordability Index is not telling the full story.

Lack of supply

The high demand for homes and the slowdown in new construction has created a lack of inventory. In September, the national inventory dropped by 38.8 percent when compared to 2019. The rise in demand for new homes may be partially due to couples looking for larger homes because both of them are working from home now. Many renters are also shopping for their first home because they want to take advantage of historically low interest rates.

The limited inventory increases the perception that homes are unaffordable. When new listings appear, they are quickly snatched up, often by cash buyers. The typical home was only on the market for 56 days in August, five days less than in 2019. Often, sales turn into bidding wars. The challenge of buying a new home in a seller’s market also discourages many existing homeowners from listing their homes, which doesn’t help the already limited supply of homes3.

The limited inventory increases the perception that homes are unaffordable.

Houses are expensive

House prices are now higher than ever and show no sign of slowing down. If you adjust for inflation, prices haven’t reached the dizzying heights of the Summer of 2006, but they aren’t far off.

Another way to compare the cost of housing over time is to use repeat-sales indices, such as the Standard & Poor’s CoreLogic Case–Shiller Home Price Indices. There are several Case-Shiller indices which are based on original work by economists Karl Case and Robert Shiller, who studied home pricing trends by comparing repeat sales of the same homes. The graph below shows the inflation-adjusted Case-Shiller and Real Building Cost indices for the United States from 1898 to 2019.

Although the Case-Shiller index is still not at a record high when you adjust for inflation, we are not far off from the 2007 peak.

In a previous article, I made the point that housing affordability has not changed much in the last 40 years if you look at the price per square foot of homes. However, the lastest data breaks with the previous trend and shows a steep rise in the cost per square foot. As we can see from the previous graph, this rise cannot be explained by an increase in building costs. The Real Building Cost index is currently at 1971 levels.

Technically, homes may be more affordable now, but house prices are now higher than ever and show no signs of slowing down.

Hard to qualify

The Housing Affordability Index measures whether families with a median income could afford the mortgage on a median-priced house. But income is not the only thing lenders consider. There are other factors that determine whether you will qualify for a mortgage. And, naturally, getting denied for mortgage loans will also influence your perception of housing affordability.

  • Debt levels. Lenders also look at how much outstanding debt applicants have. A high debt to income ratio is the most common reason for rejecting a mortgage application4.
  • Credit scores. It is very hard to qualify for a mortgage if you don’t have a credit history. Unfortunately, millions of consumers don’t have enough credit history to show up on the radar of the credit rating agencies, which limits their chances of approval.
  • Employment stability. Lenders don’t only look at the bottom line when assessing a loan application. They also want to know how stable the income is. Self-employed people and freelance workers will typically find t harder to get approved.
  • Down payment. The HAI assumes borrowers can pay a 20 percent down payment. This is quite the assumption considering the debt levels of many Americans.

The Housing Affordability Index focuses on income eligibility, but that’s not the only factor lenders consider.

The good news

It’s clear that for many of us buying a home is not as easy the Housing Affordability Index would have you believe. However, the HAI isn’t lying in its assessment of mortgage affordability. The 30-year fixed rate mortgage rate average, the rate NAR uses to calculate the HAI, is at historically low levels.

This means mortgage payments are more affordable today than at nearly any other time in history. It also may be a great time to refinance your current mortgage for one with more affordable rates.

As for the challenges listed above, they are real, but there are ways borrowers can navigate these challenges and qualify for a mortgage. Check our “How to Buy a House” guide for more information and use our free comparison tools to shop for the best mortgage rates and terms around.

Article Sources
  1. National Housing Market Summary — U.S. Department of Housing and Urban Development
  2. Housing Affordability Index — National Association of Realtors
  3. Real Estate Data —
  4. Center for Microeconomic Data — NY Federal Reserve