While most systems deriving Housing Affordability Index use very similar methodology, let’s look at the National Association of Realtors’ definitions and assumptions utilized in calculation of the Housing Affordability.  Why theirs?  For better or for worse, the NAR’s data is the HAI information that you’ll see quoted and cited most often. 

[Yes, we respect the NAR suffers at this point in history from an impairing lack of credibility in many areas; nonetheless, you need to understand how they derive their HAI data so as to understand its value and weaknesses.]

The median prices utilized in the calculation are taken from the existing home sales monthly survey conducted by the NAR. The monthly mortgage rate utilized is the “effective mortgage rate” reported by the Federal Housing Finance Board on a monthly basis; the effective mortgage rate assumes amortization of initial fees and charges. The calculation assumes a twenty percent (20%) down payment, and thirty (30) year amortization of the mortgage payments utilizing standard approaches.

The NAR utilizes Income data from the Census Bureau Decennial Survey, and makes projections in a given year until “actual” data is released by the Census Bureau. The NAR also assumes a qualifying ratio of 25% (monthly P&I payment may not exceed 25 percent of the median family monthly income); Texas A&M research center has used 28% as their qualifying ratio historically.

Of note, by US Census Bureau definition, a family consists of two or more people (one of whom is the householder) related by birth, marriage, or adoption residing in the same housing unit. A household consists of all people who occupy a housing unit regardless of relationship. A household may consist of a person living alone or multiple unrelated individuals or families living together. Again family data is utilized in the Housing Affordability Index calculations.

That said, we like the methodology that the PMI Group uses even more; theirs is at least a bit more realistic as to today’s lending parameters.  Read about their HAI methodology here (it’s in the Fall 2008 Trends Report). 

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