One of the most over-looked yet extremely important measures of home prices is how they actually relate to median household income, also known as the Housing Affordability Index. It should come as no surprise that when this index is out of whack to either extreme it means one of two things: 1. Home prices are so high that a massive correction is due to pull them in line with income or 2. Home prices are so low that there is an incredibly good buying opportunity, which eventually makes buying an irresistible choice.
According to the National Association of Home Builders, for nearly 10 fiscal quarters, almost 3 of 4 homes sold where affordable to families earning the current median income of $64,200. In addition to that measurement, the National Association of Realtors Housing Affordability Index shows a current level of 180 (over 200 in the Midwest). What does this mean? It means that a household earning the median income has 180% of the income needed to qualify for an 80% mortgage for a median priced home. Put this in perspective with the same index as measured at the peak of the housing bubble which hovered close to 106 in 2006, meaning the median household income could barely afford the median priced home.
REALTORS®: Do your home work below!