State’s Housing Affordability Drops; Appreciation, Rising Mortgage Rates Increase Costs, According to UA Center Data

TUSCALOOSA, Ala. – For the second consecutive quarter housing affordability declined in Alabama, according to information released from The University of Alabama’s Real Estate Research and Education Center.

After three years of record breaking increases in housing affordability the combination of substantial price appreciation and slowly rising mortgage interest rates have raised the cost of existing housing for Alabama consumers. Since the first quarter of 2004 the Alabama Housing Affordability, the AHAI, has fallen by almost 30 percentage points and now stands at 171.5.

The statewide housing affordability index is calculated as the ratio of the state’s actual median family income to the income needed to buy 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, assuming standard underwriting criteria and a 20 percent down-payment. The higher the index number, the more affordable the housing.

An AHAI of 171.5 means that Alabama families who earn the statewide median income of $47,256 have 1.7 times the income needed to qualify for a loan on the statewide median priced home, which was $121,871 in the third quarter. Stated differently, a family earning the statewide median income of $47,256 could have qualified to purchase a home valued at $209,008. While the AHAI numbers are still very high from a historical perspective, it is the recent downward trend that raises concerns, according to center director Dr. Leonard Zumpano.

Statewide, the median existing home price rose by 7.4 percent in the third quarter from $113,486 in the second quarter, an increase of $8,385. During the same period mortgage interest rates increased by 11 basis points to 5.83 percent, up from 5.72 percent.

At the local level, housing affordability declined in all 11 of the state’s Metropolitan Areas. The statistics for the selected counties showed that housing affordability declined in four out of the five counties tracked by the Real Estate Research Center.

Median home prices rose in nine of the state’s 10 Metro Areas, falling only in the Birmingham area. Median home price rose in four counties, declining only in Monroe County. Some locations within Alabama saw double digit housing price increases during the last quarter. In Huntsville, for example, the median home price rose by 10 percent or $11,500 between the second and third quarters.

Housing Affordability declined at the national level as well during the third quarter of 2004. HAI decreased by 3.7 percent from 132.8 to 127.9. “As in Alabama, this decline in housing affordability can be attributed to the combination of rising mortgage interest rates and the substantial increase in existing home prices during the period,” Zumpano said.

Whether the last two quarters indicate a trend remains to be seen, according to Zumpano. “Certainly, if housing prices continue to rise, more consumers, especially those at the lower end of the economic ladder, will find it increasingly difficult to purchase a home. A reasonably strong and expanding economy along with rising employment will work to keep housing prices firm, which could further erode housing affordability. This, in turn, may bode well for the apartment market which has been relatively weak during 2004,” Zumpano explained.

“The real question is how long the bond market will continue to tolerate the fast growing federal budget deficit. If President Bush is successful in making his tax cuts permanent, a quick or substantial reduction in the deficit becomes increasingly unlikely in the near term,” Zumpano said.

“Add to this, concern over the growing foreign trade deficit and continuing downward pressure on the dollar. If foreign governments, the principal buyers of U.S. government securities, lose confidence in America’s fiscal situation, there could be a capital flight out of the U.S. putting upward pressure on interest rates. If this scenario plays out, we can look forward to higher mortgage rates next year and further deterioration in housing affordability.”

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