2013 Housing Bubble: Housing Affordability Index

Yep, it’s another housing bubble. Four months ago something troubling happened in the housing market. The home price affordability index tracked by the National Association of Realtors slipped below it’s long-term trend line, marking a possible beginning of a housing bubble. 
This is how CNBC’s article: “Yep, it’s another housing bubble” begins to paint the picture of a sure to collapse housing market which has barely gotten back on it’s feet following the housing crash of the late 2000’s.

Chula Vista condo prices

As a 20% year over year rise in the median home price is something to be cautious about, it’s the data the writer is pointing at that concerns me. John Carney, the author of the article in question is specifically drawing attention to the National Association of Realtors’ Housing Affordability Index which measures the household income needed to qualify for a mortgage to purchase a median priced single family home assuming a 20% down payment and a monthly payment below 25% of total income.

With the rise in home values it makes perfectly good sense for the Housing Affordability Index to move lower. The alarm raised is due to the fourth consecutive month in which the index is below the “long term trend” or projected trend. As it stands, the current National Association of Realtors’ Housing Affordability Index for July (most recent numbers) is 157.8 compared to 210.7 in January.

What the numbers mean: If the Index were at 100 this would mean a household earning the median income would have exactly what it would need to qualify for a mortgage to purchase a median priced single family home. An Index above 100 such as the current 157.8 reflects households have more income than needed. Based on the current median home price and median household income a family would have 57.8% more income than needed to qualify. Hope that’s not too confusing but that is a far cry from a housing bubble even at current levels.

Near the end of his article, John Carney all but discounts his suggestion of a Housing Bubble:
Unfortunately, it’s not clear that the index is very useful on its face. The index has never, in fact, dipped below 100 since the late 1990s.

The lowest point the National Association of Realtors’ Index has reached in recent history was 101 in July of 2006.

San Diego’s Numbers

For a  look closer to home, the CALIFORNIA ASSOCIATION OF REALTORS’ HOUSING AFFORDABILITY INDEX, differs from N.A.R.s Index in that it measures the percent of households who can afford to purchase a median priced home instead of income needed. C.A.R.s Index for San Diego County was 28 in the 1st Quarter and 32% in the 2nd Quarter of 2013 which means less than 1 in 3 can currently qualify for a single family home in San Diego County. C.A.R.s Housing Affordability Index for the 2nd Quarter of 2007 was 11.  Only 1 in 10 could qualify… now that was a housing bubble.

The Last Word

The housing collapse caused home values to plummet far below normal and have recently been making up ground. We will undoubtedly begin to see a slower pace of appreciation and a possible pullback in some areas of the country. In fact some areas have already been experiencing subtle declines in median home prices due to a spike in inventory which was lacking earlier in the year. San Diego’s Median Home Price for example is down nearly 15% in less than 2 months. What the future holds no one knows but it sure helps to work with a real estate professional who has first hand knowledge of what is happening.

About Daniel Di Matteo

Realtor at CENTURY 21 Award, Daniel was Voted U-T San Diego’s Best Real Estate Agent in 2014. A Husband, Father, and most recently, accomplished Blog writer, which explains your visit today.