What about the usefulness and potential weaknesses in the Housing Affordability data?

The savvy investor understands that Housing Affordability Index values are general indicators of housing prices relative to local incomes; however, the Housing Affordability Index is not as statistically sound as one might be led to believe.

Perhaps the greatest weakness in the Housing Affordability Index computation is the sourcing of the median home price. Median home price data is reported by the local MLS / board of Realtors. It must be remembered that the reported data includes only units sold by Realtors. Homes sold directly by the owner, REO sales, and short sales may not be included in the reported information, an issue of critical import in some markets. Mortgage rates vary from community to community, sometimes significantly.

Median family income data is also considered to a somewhat imprecise measure, and is subject to various potential flaws in derivation and reporting; we’re not going to take the time to point out all the issues with median home price data in this post. 

One of the more recent criticisms we’ve read about current housing affordability measures in that they’re not “complete enough” – they don’t take into account all of the other myriad costs that owning a home entail – insurance, maintenance, furnishings, and so on and so forth. 

We agree with all the critics who suggest that the measures are incomplete and have several critical flaws – we’re still waiting for someone to create and calculate a new and improved measure.  In the meantime, the HAI and HOI are probably the most useful given their broad geographical coverage and relatively consistent methodology (as flawed as it might be). 

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