Housing Affordability Increases in Last Quarter of ’04, According to UA’s Real Estate Research Center

TUSCALOOSA, Ala. – After three consecutive quarters of decline, housing affordability in Alabama actually increased during the last three months of 2004, according to figures from the Alabama Real Estate Research and Education Center at The University of Alabama.

The Alabama Housing Affordability Index increased by 7.7 percentage points in the fourth quarter to 179.2. However, for the full year, the AHAI declined by 20.8 percentage points, falling from a high of 200 during the first quarter of last year. The average annual Alabama Housing Affordability Index was 183.4 for 2004.

“The combination of slowly rising interest rates and sharply higher home prices during the first three quarters of the year more than offset the slight improvement in the index during the last three months of the year,” said Dr. Leonard Zumpano, director of the center. For the year, median home prices in Alabama are up 6.5 percent in the areas tracked by the Alabama Real Estate Research and Education Center. During the same time period mortgage interest rates were up only 17 basis points, hitting a high of 5.83 percent during the third quarter of 2004, Zumpano said.

Last year’s decline in housing affordability was the first since 1996 when the AHAI stood at 143.8. The Alabama Housing Affordability Index had set a record in each of the last eight years. The consecutive eight year increase in housing affordability is itself a record, Zumpano said.

“Never have we seen such a sustained and uninterrupted improvement in housing affordability within the state of Alabama,” he said. The average annual housing affordability index for 2004 was 183.36, down from last year’s record setting 194.4.

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, assuming standard underwriting criteria and a 20 percent down-payment. Higher index numbers represent more affordable housing.

An AHAI of 179 means that Alabama families who earn the statewide median income of $47,256 had almost 1.8 times the income needed to qualify for a loan to purchase the statewide median priced home, which was $117,434 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 $210,442. While the AHAI numbers are still very high from a historical perspective, it is the recent downward trend that raises concerns, Zumpano noted.

Within Alabama, the HAI increased in six Metro Areas and declined in the remaining five Metro locations, according to the center’s figures. “Not surprisingly,” Zumpano said, “these changes were due solely to changes in home prices, with prices rising in locations where housing affordability declined and vice versa.”

The Baldwin County Metro Area had the lowest housing affordability index, reflecting the very sharp run up in Gulf Coast properties, while housing affordability was highest in Anniston with an HAI of 225.7 in the fourth quarter.

At the national level, housing affordability also increased during the fourth quarter of 2004, although by a smaller amount than was the case in Alabama. The U.S. Housing Affordability Index rose by 1.6 percentage points to 129.5 during the last three months of the year. As was the case in Alabama, housing affordability in the U.S. peaked in 2003; the full-year HAI for the U.S. declined from 140.8 in 2003 to 133.8 during 2004.

Will 2005 see continuing erosion in housing affordability? “With most economists predicting that mortgage rates will rise slowly, increasing to around seven percent by the end of the year, demographic factors such as population growth and household formation and tight supplies will continue to put upward pressure on housing prices,” Zumpano said. “Decreasing affordability, at least in the short-term, will tend to dampen demand and slow price appreciation. Even so, existing home prices are still expected to increase by four to five percent during the year, making for another strong housing market in 2005.”

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 for offering a high-quality, cost-effective education.