Housing Affordability Index vs. Median Home Price
I felt compelled to write a quick blog on this one as a follow up to my Affordable Homes Part I piece. If you follow the link at the bottom of that Blog you’ll find Median Home Prices in those burbs. Those numbers may shock you, but what’s really important is the Housing Affordability Index (HAI) rather than the Median Home Price.
Housing affordability is top of mind for those of us living in or close to Denver, especially since this area is one of those in the West where median housing prices are above median housing prices nationally. Probably contributing to the madness, Denver was just ranked No. 1 on U.S. News and World Report’s Best Places to Live https://realestate.usnews.com/places/rankings-best-places-to-live.
But, it’s actually the monthly Housing Affordability Index that provides a reliable way to track over time whether housing is becoming more or less affordable for the typical household. The HAI incorporates changes in key variables affecting affordability: housing prices, interest rates, and income.
So, how is HAI calculated?
Without getting too technical, the HAI index has a value of 100 when the median-income family has sufficient income to purchase a median-priced existing home. A higher index number indicates that more households can afford to purchase a home. The basic formula is:
HAI= (Median Family Income/Qualifying Income) *100
Anyone can google Median Family Income in Denver. Using a couple of filters, realtors can find the median-priced home for certain areas around town on the MLS. Qualifying income is basically the monthly payment on a median-priced home at the current mortgage interest rate. Assumptions: 20% down payment, 30 year fixed loan, and the max mortgage payment is 25% of gross monthly income in the household.
What does the ratio tell us?
A higher HAI ratio indicates relatively more affordability. A ratio of 100 indicates that median- family income is just sufficient to purchase the median-priced home. When the ratio falls below 100, the typical household has less income than necessary to purchase the typical house. Ratios above 100 indicate that the typical household has more income than necessary to purchase the typical house.
So, I did the math and checked the stats. Despite all the doom and gloom that the media portrays, the HAI in Denver is approximately 123. So even though it may not feel like it, Denver is still affordable- at least that’s what the numbers say. Until more people start catching on that Denver is #1, that is.