What Does Housing Affordability Mean?

Every week there are new articles published about housing affordability going up or down.  What does that mean and how can it help you decide whether it is a good time to buy?

Housing affordability describes how affordable it is to buy, own, or rent housing.  It is measured by the percentage of your household income you have to spend on housing each month.   According to government standards, anything over 30% of your household income is considered unaffordable.  The National Association of Realtors (NAR) recommends an average of 25%.  This means that no more than 25% of your pre-tax income is spent on mortgage payments, taxes, insurance, and utilities.

Based on this definition, there are three things that affect housing affordability:
•    Home prices
•    Mortgage rates
•    Household income

If home prices or mortgage rates go down, you can afford more house for the same payment, so affordability goes up.   Household income is more personal and has an opposite effect.  If your income decreases, affordability goes down since you can afford less home. It is important to take all three factors into consideration.

You can track home values through Zillow’s Local Info pages and mortgage rates in Zillow Mortgage Marketplace, but you are on your own for your personal income.  Right now home values are down, mortgage rates are down, and average household incomes are down.   The drop in home values and mortgage rates make it a great time to buy if you still have a strong income.   This is especially true for first-time home buyers who can take advantage of $8,000 first-time home buyer tax credit.

However, a recent USA Today report based on 2008 census data said housing affordability overall is down because of lower incomes and people being stuck in underwater mortgages.  These homeowners can’t take advantage of the lower home prices and mortgage rates like new home buyers.

September 25, 2009