State’s Housing Affordability Takes Nosedive After Three Quarters of Record Highs, According to UA Center

TUSCALOOSA, Ala. – After three consecutive quarters of record setting highs the Alabama Housing Affordability Index fell in the third quarter, according to the Alabama Real Estate Research and Education Center at The University of Alabama.

The AHAI for the July through September period was 169.6, down 9.3 percentage points from the record high of 178.9 in the second quarter of the year.

“The principal culprit behind the fall in housing affordability was a very dramatic increase in existing home prices during the period,” said Dr. Leonard Zumpano, director of the center.

“The median home price rose by slightly more than 6 percent statewide during the third quarter of 2001 to $105,635, compared to $99,334 posted during the second quarter.”

At the national level, housing affordability also declined during the third quarter, falling from 138.2 in the second quarter to 130 during the July-September period, a decline of 8 percentage points, according to Center figures.

“Here too, the principal cause for declining affordability was an increase in existing home prices during the third quarter. This decline occurred despite a fall in mortgage interest rates of 8 basis points between the second and third quarters to 7.06 percent,” Zumpano said.

The statewide housing affordability index is calculated as the ratio of the state’s actual median family income to the income needed to purchase and finance the state’s 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 loan on the state’s median priced, single-family home.

The higher the index number, the more affordable is the housing. An index number of 169.6 means that Alabama families earning the statewide median income of $46,056 had 1.7 times the income needed to qualify for conventional financing on a home costing $105,635, the statewide median.

Alternatively stated, households earning the statewide median income of $46,052 could afford to purchase a home priced as high as $179,000 using conventional financing, a 20 percent down payment and a 30-year term. “Obviously, housing affordability remains very high in most Alabama locations, in absolute terms and relative to the rest of the U.S.,” Zumpano said.

Within Alabama, housing affordability fell in 6 of the state’s 11 metropolitan areas, while rising in the remaining five metro areas. Not surprisingly, Zumpano said, in those areas where the housing affordability index declined, existing home prices rose, while just the opposite scenario held in locations where affordability increased.

The fact that housing prices rose in 6 of the 11 metro areas and in 6 of the 7 counties tracked by the Real Estate Research Center suggests that the housing sector remained relatively strong during the third quarter of 2001, according to Zumpano. “This appreciation in home prices occurred amidst growing evidence of a slowing housing market, which began to show signs of decline in August and worsened during the month of September,” he said.

“What appears to be a worsening economy, which is only now being reflected in Alabama’s housing sector, should put downward pressure on housing prices and home sales,” Zumpano said. “With statewide housing prices beginning to show signs of softening, at least in some locations, and 30-year mortgage rates hovering around 6.5 percent, housing affordability should increase during the last three months of the year.

“Such a buyer’s market may not last long, however. If the economy bottoms out during the fourth quarter and economic activity picks up next year, as some economists expect, housing prices and mortgage rates will firm up as housing demand recovers.”

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.