Housing Affordability Rebounds, Hits New High For State

TUSCALOOSA, Ala. — After declining for three consecutive quarters, housing affordability rebounded strongly during the final three months of 2000, according to the Alabama Real Estate Research and Education Center at The University of Alabama’s Culverhouse College of Commerce and Business Administration.

Statewide, the Alabama Housing Affordability Index increased by 17 percentage points during the fourth quarter of 2000 to end the year at 172.9, the highest the index has been since the Center began calculating housing affordability in 1992. The previous record was set in the fourth quarter of 1993, when the index hit 172.

At the national level, housing affordability also increased after declining through the first three quarters of last year, according to Dr. Leonard Zumpano, director of the center. For the fourth quarter of 2000 the national index rose by 8 _ percentage points, from 125.8 in the third quarter to end the year at 134.3.

The statewide housing affordability index is calculated as the ratio of the state’s actual median family income to the family income needed to finance and purchase the median priced home. An index number of 100 means that a family earning the state’s median income has just enough buying power to qualify for a mortgage on the median priced, existing single-family home, given standard loan underwriting criteria.

The higher the index, the more affordable the housing. An index number of 172.9 indicates that Alabama families earning the state’s median income of $45,147 had 173 percent of the income needed to qualify for conventional financing of the statewide median priced home reported for the fourth quarter.

Simply stated, a Housing Affordability Index of 172.9 means that Alabama consumers can purchase larger and more expensive homes than would have been possible earlier in the year. Given the underwriting assumptions used in the construction of the index, a family earning the statewide median income could finance and purchase a home valued at $164,109, almost $70,000 higher than the statewide median priced home of $94,499.

“If I were looking to become a first-time homebuyer or to move-up in my housing needs, I would act now while interest rates are lower, housing inventory is strong, and home prices are affordable all across Alabama. It’s a great time to list or buy a house in Alabama,” said J. Danny Cooper, executive vice president, Alabama Association of REALTORS.

“The combination of much lower mortgage interest rates and falling home prices helped push the housing affordability index into record territory,” Zumpano said. “Mortgage rates fell by 51 basis points, or slightly more than a half percent, during the fourth quarter. At the same time the statewide median price fell by almost $6,500, from $101,405 in the third quarter to end the year at $94,907.”

Within Alabama the housing affordability index rose in all 11 of the state’s metropolitan areas. Not surprisingly, existing home prices fell in 10 of these metro areas, with only the Birmingham Metro Area reporting an increase in existing home prices, from $126,169 in the third quarter to $127,767 in the fourth.

Decatur had the highest housing affordability index number during the last three months of last year at 214.7. In effect, residents of the Decatur that earned that Metro Area’s median income of $49,700 had more than twice the income needed to purchase the median priced home in Decatur. Housing affordability also rose sharply in Anniston, Dothan, and Montgomery. The lowest housing affordability index number of 129.9 was recorded in the Mobile Metro Area.

Zumpano said a look at the county affordability numbers sheds further light on the Mobile Metro Area, which is made up of Baldwin and Mobile Counties. “Although housing affordability increased in both counties during the forth quarter, housing affordability is much lower in Baldwin County than in Mobile.

“It is also important to point out that the Baldwin County is somewhat atypical because it has a much higher concentration of vacation and waterfront properties,” Zumpano said. “Because these vacation homes have much higher prices than typical owner-occupied housing located outside resort areas, the HAI for Baldwin County understates housing affordability.”

The index also rose in the other counties tracked by the Alabama Real Estate Research and Education Center. “Tallapoosa County benefited from an incredible increase in housing affordability during the fourth quarter, which saw the HAI rise from 117.6 in the third quarter to 245.8 for the last three months of 2000, reflecting a substantial decline in existing home prices during the quarter,” Zumpano said.

“The median price of $60,492 has to be interpreted with care as there were relatively few sales during the quarter and there is always an extremely high variance in home prices because of the presence of waterfront properties.”

The number of existing home sales in the U.S. and Alabama slowed which, together with falling prices, suggests the housing market slowed during last quarter. Part of this slowdown was triggered by a series of successive interest rate increases engineered by the Federal Reserve last year, according to Zumpano.

“The last quarter of last year saw interest rates begin to moderate, and through the first two months of the new year, mortgage interests rates have continued to drop. So long as there isn’t significant erosion in household income during the year, housing affordability should continue at the high levels reported here. If the Federal Reserve acts to lower interest rates again, the housing market and housing affordability should remain strong through the first half of the year.”

The Alabama Real Estate Research and Education Center is part of The University of Alabama’s Culverhouse College of Commerce and Business Administration. The UA business school, founded in 1919, has been recognized repeatedly during the 1990s for offering a high-quality, cost-effective education.