Housing Affordability Sets Record in Third Quarter, According to UA Center’s Stats

TUSCALOOSA, Ala. – Housing affordability in Alabama set a record in the third quarter after two consecutive quarters of declines, according to the Alabama Real Estate Research and Education Center in The University of Alabama’s Culverhouse College of Commerce and Business Administration.

Going into the second half of the year, the Alabama Housing Affordability Index (AHAI) rose to 188.4 from a figure of 178.8 last quarter. This beats the last record index number of 186.7 set during the fourth quarter of last year.

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. Higher index numbers reflect more affordable housing.

In Alabama, during the third quarter, households earning the median income of $46,744 had almost twice the income needed to qualify for a loan on the purchase of the median priced home.

“The sudden increase in housing affordability can be attributed almost completely to falling interest rates,” said Dr. Leonard Zumpano, director of the center. “Although the median home price fell from the second to the third quarter, the third quarter figure of $103,330 is still 2.1 percent over the $101,178 price recorded in the first quarter of 2002 when the Affordability Index sat at 183.6. Interest rates, on the other hand, have fallen from an average 6.85 percent in the first quarter to 6.39 percent in the third quarter of 2002 and are still falling …”

The housing situation was much the same at the national level during the third quarter. The U.S. Housing Affordability Index increased from a revised figure of 132.4 in the second quarter to 135.3 in the third quarter of this year. As was the case in Alabama, the explanation is falling interest rates, Zumpano said.

Since the first quarter of this year, average effective interest rates have fallen from 6.76 percent to 6.41 percent while existing home prices have increased from a median of $151,000 to $161,000 during the third quarter of 2002. This represents a 6.6 percent increase in home prices over the first nine months of the year, which is equivalent to an 8.8 percent annual rate of return. In contrast, the median family income at the national level has increased to $52,689 from $52,168 over the same nine months. This represent only a 1 percent increase, well below the 6.6 percent increase in home prices.

Within Alabama, housing affordability increased in 8 of the 10 metropolitan areas tracked by the Alabama Real Estate Research and Education Center. “The housing affordability index fell only in Huntsville and Montgomery, the two locations, not coincidently, that saw the greatest rate of home price appreciation during the third quarter,” Zumpano said. “Ironically, these were the only two areas that experienced increases in affordability because of falling prices last quarter.”

Residential housing market activity has been very strong throughout the year, although there is some recent evidence of slowing sales. Total sales for the first nine months of the year are still ahead of last year at this time, and 2001 was a record year. Part of the explanation for the strong housing market performance is the extremely attractive long-term mortgage interest rates, Zumpano said.

“With loan rates continuing to fall, more first time home buyers are able to qualify for mortgage financing, and existing home owners are trading up,” Zumpano said. “Demographic trends, such as the aging of the baby boom generation and the growth in the number of single, female households, also suggest that long-term housing market prospects will remain favorable. Boomers, who are now moving into their prime earning years, are major candidates for second and vacation homes, as well as more expensive trade-ups. Single, female, heads of households have approximately double the rate of homeownership as their male counterparts.”

There remain two possible warning signs on the horizon, according to Zumpano. “First, if housing prices continue to rise and outpace the growth in household income, more and more households will be priced out of the market. Second, the depressed stock market is creating a negative net wealth effect. When household net worth declines, households tend to spend less. Since its peak, the stock market has lost almost $7 trillion dollars in value. With most Americans invested, at least to some degree, in the stock market, the slide in share prices is having a depressing effect on consumer spending, including big-ticket items such as housing. Fortunately, the increase in home equity values over the past decade has helped offset the loss in stock valuations, as well as helped to support the overall economy. Ironically, the fall out in the stock markets may be encouraging some investors to move into real estate and the housing markets. If we are at, or near, the bottom — as far as the stock market is concerned — near-term prospects for the housing markets should improve.”

Zumpano said the center can no longer calculate a housing affordability index for the Decatur Metropolitan Area, because the Huntsville and Decatur multiple listing services combined operations and their real estate listings.

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.

Contact

Bill Gerdes, UA Business Writer, 205/348-8318

Source

Dr. Leonard Zumpano, professor of finance, chair of real estate, and director of the Alabama Real Estate Research and Education Center, 205/348-8988