All this week, we will be looking at the Housing Recovery meme, challenging the assumptions and data that make up that argument. Yesterday, we began with Debunking the Housing Recovery Story (Part 1 of 5). Today we look at exactly how affordable homes are today, as well as the home buying public’s ability to afford them (Home Affordability/Employment & Wages).


Today, we are going to take a closer look at Home Affordability — and we learn that homes are not in fact very affordable at all.

We begin where nearly every other conversation about home affordability seems to start — with the National Association of Realtors (NAR) Home Affordability Index.

We first looked at this index back in August 2008, in a post appropriately titled NAR Housing Affordability Index is Worthless. Why did I come to such a harsh conclusion?

“The index as presently constructed is utterly worthless. It provides little or no insight into how affordable US Housing actually is . . .  As hard as this might be to imagine, it shows that over the course of the biggest run up in housing prices in American history, the Index remained perfectly affordable. Except for one monthly reading of 99.55 in late 2005 — a smidge below 100 — housing never dipped into the level of unaffordable over the entire giant housing boom.”

So the entire run up preceding a 35% drop in prices, the NAR HAI had but one month where homes where not deemed affordable. As ridiculous as that sounds, its even more absurd when we take a look at the NAR methodology:

“The index ignores factors like family savings rates, available cash assets, consumer credit, indebtedness, credit servicing obligations, inflation, income gains, and mortgage availability.”

The kindest thing I can say about the Affordability Index is that it lacks context. Hence, it looks at the wrong things and ignores the important ones. The question is not whether, in the abstract  homes are theoretically affordable; Rather, the correct question is whether potential buyers can afford homes. Ignoring this as it does means this is a meaningless metric for assessing the most important question of all when it comes to a US housing recovery: Whether or not people living in America can afford to purchase homes located in the same nation.

Sure, houses in the US are affordable to cash-rich Martians visiting Earth looking for a place closer to the Sun. But, not surprisingly, little green men with lots of cash are not what will be driving any US housing recovery. We can say the same about cash-rich Asians and South Americans (and any Europeans assuming the Euro is still around).

Why does this matter?

In the real world, the home buying process begins with two key financial factors: The potential buyers down payment, and their ability to qualify for a mortgage.

In today’s world, most American families are cash poor and debt rich. They are deleveraging, not saving. They simply do not have the $40,000 that is the standard 20% down payment on the median priced US home.

Those that do have the extra cash must then meet the next hurdle: Qualifying for a mortgage. This means they must have a good credit score, not be carrying too much debt, have a steady income, etc. (Even those that qualify must then make sure that their house appraises at the sale price, but that’s a latter discussion).

Regardless of the fact that homes are off 35% from their peaks, and mortgage interest rates at record lows, buyers have an insurmountable hurdle. For most potential home buyers, the NAR Home Affordability Index is a meaningless data point. Lacking any down payment and having restricted access to available mortgage credit, homes may be theoretically affordable — just not to them . . .


Tomorrow: The problem with Mortgage Rates


NAR Housing Affordability Index is Worthless (August 13th, 2008)

See also:
NAR: Methodology for the Housing Affordability Index

Category: Credit, Data Analysis, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Home Affordability Reality Check (Part 2 of 5)”

  1. Wiggs says:

    It’s amazing how few people actually take into account the balance sheet side of the home buying equation.

    Great report on Bloomberg from a couple of weeks ago, entitled “It’s the Balance Sheet, Stupid!” looking at the actual cost of renting vs. owning in some of the nation’s major markets.

    Disclosure: I am one of the authors of said report

  2. mgbee says:

    And you didn’t even mention the cost of insurance, property taxes, association dues and maintenance. I own my home outright but the monthly cost of those items is 500/month ( I live inf Florida) if I had a mortgage I couldn’t afford my home, which is a very modest 1300 sf.
    Houses are not affordable for the middle class nor are they ever a good investment.

  3. Nuggz says:

    ” They simply do not have the $40,000 that is the standard 20% down payment on the median priced US home.”

    And they are going right back to the place where they should have been all the time……………RENTING.

    It’s not a dirty word.


  4. Savage1701 says:

    Enjoying this series. Looking forward to the next part.

  5. theexpertisin says:

    BR, right on so far with your housing series. A succint, truthful, unvarnished presentation.

    The subsidized housing industry is a racket, producing many 1%’ers at the expense of tax payers. I hope you find the inclination to address this as well. Everything from the application process to the tax treatment, probably designed with good intentions back in the day, is corrupt.

  6. Greg0658 says:

    “to cash-rich Martians visiting Earth looking for a place closer to the Sun” heyheyhey with above ground drinkable H20 … (currently)

    Day after tomorrow: The problem with Mortgage clear Titles

    ‘RENTING’ .. what happened to .. ‘pay off someone elses mortgage’ .. gotta like the Madison Ave ads with the hampster wheel

  7. Transor Z says:

    Average oil-heated home here in Mass (~40% of homes) will consume about 900 gal/yr of oil. So $3600/yr in oil heating costs here in the Northeast.

    Many towns increased property tax rates after the financial crisis because of the serious shortfalls in tax revenue that resulted from 30%-40% drops in home prices.

    Rule-of-thumb monthly maintenance costs are $100/mo per $100k of value. So $200k home referenced in Barry’s post would be $200/mo, in addition to mortgage, heating, taxes, and utilities. Obviously, YMMV.

    So you’re carrying roughly $700 or $800 in monthly costs — in addition to monthly PITI mortgage/escrow payments.

    So let’s say you’re one of those who does have $40k in cash for 20% down to get a conventional loan at 4%. A lot of folks will finance $5k or so in closing costs so you finance $165k for 30 years.

    Monthly PITI is about $1000, plus $750 in misc. costs above, so $1750. It takes about $2500/month gross salary to produce that, but you do get the mortgage interest deduction, so there’s that.

    To service your house, you’ll need roughly $30,000 in annual salary. And of course, this doesn’t address existing obligations like student loans, credit card balances, auto loans.

    Rhetorical Question: how does $30,000 annually square with median household income in the U.S.

  8. To answer a question in advance:

    “To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite HAI of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the HAI, then, shows that this family is more able to afford the median priced home.”

  9. Tutti says:

    Barry, I can’t speak to other parts of the Country, but here in the North East, property taxes are disheartening. It is a sham that on top of your mortgage you are looking at +/- $15k a year for taxes- and we aren’t talking about a large estate either.
    There doesn’t seem to be a break coming anytime soon. The boobs in Nassau County Long Island are threatening to raise property taxes to meet budget shortfalls. In Westchester the local gov’t seems to think behind every home there is a money shrub where one simply pulls off 100$ bills to meet their obligations.
    When does it end?

  10. MayorQuimby says:

    I have no data to back up this claim but I would suggest that most (if not all) of the reductions in pricing has been offset by Fed-induced inflation in cost of living, higher property taxes etc.

    So where does that leave us? Flat in terms of affordability.

    Still say we don’t ‘bottom’ until the country’s balance sheet is in order, tuition is affordable (read: 60% lower from here or better), housing sells at 2x – 2.5x wages, public unions and their insidious property taxes are long gone and people have enough for a 25% downpayment MINIMUM.

    So I’m looking at the 2025 – 2045 time frame.

  11. KmanNYC says:

    This was just a take down of the NAR Housing Affordability Index. I don’t think you make the case that homes are not affordable. They may be unaffordable. You just have not made a case here supported by facts.

  12. Greg0658 says:

    Tutti – I understand your angst .. don’t fall prey to pitting of S’ism and C’ism (or worse)

    the problem we face is outsourced jobs making desired stuff … the government must & will carry on … who made whos problems

    paper pushing is not growth – it may be a job – but its not GDP

  13. Jim67545 says:

    I am puzzled by the statements that it is better/cheaper to rent than to own. Wouldn’t a landlord pay roughly the same to acquire, repair, maintain, etc. a home? (Perhaps better information and the willingness to buy a good home and not the “perfect” home gives the landlord a price advantage.) In some jurisdictions (such as where I live) a landlord pays more in taxes than a homeowner would – which has to be passed on to the renter. Same for interest costs if any part of the purchase is financed. Then, of course, there is the profit the landlord needs which a homeowner does not.

    Utility costs (fuel oil, water, power) are usually paid by the tenant – either directly or, in the case of common heat in an apartment building, in the rent paid.

    The reason renting seems cheaper is that the comparison is between an 1900 sq. ft. home on a lot to a 1400 sq ft apartment in an apartment building. In other words, they are downsizing or moving down several rungs of the real estate ladder. We are not comparing apples to apples. Or perhaps people are renting homes they would be disinclined to purchase. People are choosing less.

  14. 873450 says:

    Related article in today’s NYT:

    Where Housing Once Boomed, Recovery Lags

  15. tagyoureit says:

    Paper pushing is a service. Just like digging up rocks is a service and melting rocks with fire is service, and using those melted rocks to smash other rocks, and to make machines dig up more rocks faster.

    Rocks, Scissors….



    Remember the parable of the Stonecutter…

  16. louis says:

    “In the real world, the home buying process begins with two key financial factors: The potential buyers down payment, and their ability to qualify for a mortgage.”

    And to think just 5 short years ago that did not matter.

    “They will loan out the money, won’t they?” Bernanke.

    Can anyone get a loan these days? I know that large groups of investors can. Who then turn your neighborhood into a crime ridden rental slum.

    “John Paulson’s office”
    Can I speak to Mr. Paulson?
    “What is this in regards to?”
    “My neighbor has not mowed his lawn in 2 months.”
    “Let me transfer you to someone that can help.”
    “Lew Ranieri speaking.”

  17. summersorama says:

    I agree with some of the comments that say this post just did a good job in highlighting the problems with the NAR affordability index. I agree with many of the points BR made about why its a poor index and needs a good deal of context around it to be understood, but I don’t think there was a strong case made for why housing isn’t affordable. I think it’s important to consider whats going on in the rental market to get a good relative view of affordability. Residential rents are increasing, rental vacancy rates have dropped steadily for two years, and, as another commenter noted, many of the increased costs associated with owning a multi-unit property are passed onto the renter.

  18. wally says:

    Too many generalizations about “people don’t have the money.
    Sure they do. You need to look market by market… because the biggest house price component is labor and that is priced locally. That’s why houses in Nebraska or Texas and elsewhere are cheaper than in New York… and why they are affordable to people who live in those areas.
    Saying the Affordability Index “lacks context” may or may not be true, but certainly doesn’t address the question of whether housing has “bottomed”, which was supposed to be the stated purpose of this series of posts.

  19. willid3 says:

    wally not really. houses in Texas might be cheaper than in NY. but the incomes in Texas are also much lower too, not sure that the biggest reason house are expensive is just labor. land in Texas is cheaper than in NY too. but can’t forget that incomes are much much lower too

  20. econimonium says:

    Wow, the comments here are very vague and not very scientific, sort of like the NAR number itself. I live in the NorthEast, in a pretty expensive housing market (Metro Boston). And I just did some work in the area and refinanced so I’ll share.

    First of all, the prices are VERY local. There is a WIDE swathe of difference in price even within a 10 mile radius of downtown Boston. So “affordability” sort of loses its meaning. Are you speaking of being able to buy ANY property or being able to live in specific areas? Anyone can afford to buy even here and even working a service industry job. It just depends on your expectations. You’re aren’t going to live in, for example, Beacon Hill, the South End, or Marblehead for that matter making the median wage, but you can certainly buy in many other areas in proximity.

    Secondly, the low percentage on the mortgage and the tax break means a lot to people at the median. Perhaps not to YOU personally, but in a general way it does. If you were to take away the current tax advantage, and rates went up 1.5 points, housing now would drop even more. Is that what anyone wants? How many people are affected by that versus keeping these advantages? Do you think the Federal Reserve has this in mind while they’re keeping rates low also?

    The moral here is that looking at any overall figure is pointless. Real Estate is the quintessential local market and it works by zip code. You might start asking yourselves, instead, if you’re thinking of the houses on HGTV instead of reality, and that includes most of you posting. You just have to get real about where you can live and buy accordingly. Period.

  21. Mark Down says:

    Part 2: Should be called.

  22. Hammer of Thor says:

    “They simply do not have the $40,000 that is the standard 20% down payment on the median priced US home.” This would seem more valid if there statistics shown proving this.

  23. This is not a statistic that is assembled and reported anywhere else, but rather, is inferred from other data points. To wit:

    -Home sale volumes are off 20% from their peak run rate of 5.5 million (currently 4.06 million annual sales)
    -Existing prices of homes have fallen 35% from the peak.
    -All-cash sales rose to 33% of transactions (NAR)
    -Investors purchased 23% of all homes (NAR)
    -An increasing percentage new Builder Starts are multi-family units made for rentals. In the most recent month (February 2012) Single-family authorizations were at an annual rate of 472,000 while buildings with five units or more were at a annual rate of 219,000 (BEA)

    All of these data points are consistent with a dearth of starter home purchases due to many factors, but IMO, no down payment / no mortgage qualifications are the primary reasons.

    If you have some data that supports a better explanation, I would love to see/hear it.

  24. BennyProfane says:


    “People are choosing less.”

    The rental market, like most markets in our somewhat free market capitalistic state (the “housing”, or “homeowning” market is not one of them – way to much government support) is subject to the laws of supply and demand. When I shop for a rental, I look at price only, and do not concern myself with my landlord’s cost. If he was to come to me every year and ask me for more rent because his costs went up for some reason or another, I may very well pack up and move, and let him find another reliable tenant. But, you know, he hasn’t raised my rent in five years. Maybe because it’s damn expensive to transition to another tenant (could be two or three or more months of vacancy), and he knows his rent check will be in his hand first of the month, every month. Can’t so that for many many tenants out there. Besides, he wouldn’t want me to be suddenly inspired, and start shopping Craigs again.

    There has been a lot of media coverage about investors, large and small, buying up REOs to rent. Fine, SOMEBODY has to buy these things before they rot into the ground, but, in Las Vegas, so many homes have been sucked into this game and put out for rentals, that rents are dropping. Like I said, supply and demand. Too bad about your property tax bill, Mr. Landlord. Not my problem.

  25. craptacular9 says:

    While it’s easy (perhaps necessary) to pick on the NAR, I think there’s a big difference between affordable and fair value.

    Barry defined affordable as:

    “In the real world, the home buying process begins with two key financial factors: The potential buyers down payment, and their ability to qualify for a mortgage.”

    Using that definition, homes were affordable during the run up because the market (albeit stupidly) didn’t require a 20% down payment and anyone that could fog a mirror could qualify for a mortgage. That doesn’t mean that it was prudent, and it doesn’t mean that homes weren’t overpriced. However, virtually anyone that wanted a house, could get one. Now….whether the mortgage payment on the 0% Down, 1 year I/O Option ARM would be affordable in the future is another matter.

    As to the ultimate question of whether the market has bottomed, I think homes are much closer to fair value now. Who knows, they could be under-valued. However, using Barry’s definition again – homes are less affordable now as many buyers don’t have the cash to put down 20%. Existing home owners that did put 20% down, have lost most, if not all, all of the equity and couldn’t upgrade if they wanted to.

  26. decius says:

    Is anyone publishing a quantitative analysis of the factors you mention? (Current loan standards vs consumer credit worthiness, consumer savings and debt obligations) It seems that many of the component datapoints are available – it would be interesting to see numbers on how many people have the means to afford an “average” house, how much those numbers have changed over the past 5 years, etc…


    BR: Fed publishes credit officer survey; I have some charts from NDR later in the week showing median income to median price . . .

  27. [...] I’ll pick that up in a follow up piece as well … but please note, I’m not as fast as Barry. He’s the financial blog king, as I’ve just reaffirmed today. ___ Further Reference: -Home Affordability Reality Check (Barry Ritholtz) [...]

  28. Bob A says:

    whether it’s the smartest or most affordable choice or not, many people still want to own a home.
    and more of them are buying than in recent years
    4-County Puget Sound Region Pending Sales (SFH + Condo combined)
    (no I’m not that bob)

    After all.. if you’ll pay $800+++++ for an ipad when a $299 kindle will do just fine..
    what’s a little extra each month for home ownership

  29. BillG says:

    @Willid “houses in Texas might be cheaper than in NY. but the incomes in Texas are also much lower too”

    Not really.

    Per the Census Bureau the NYC metropolitan area is 12th in the country in household income at $50795.

    Austin is 17th at $48950 and Dallas is 25th at $47418. The median home prices (per NAR) are $379K for NYC, $193K for Austin, and $149K for Dallas.

    So if you’re the median income earner then you’re basically financing an extra $230K in mortgage debt but you only get $3300 in extra salary to do that. And since the taxes are a lot higher in NYC than Dallas then in reality you really don’t even get that much.

  30. rubicon_runner says:

    I really like your blog but I have a bone to pick with you when you paint with such a large brush.
    You speak of cognitive dissonance yet in this case, fail to see it in yourself.

    I’m not saying real estate is on fire but February’s LPS data for sunny California shows a clear advantage when compared to NY.
    Again…….it’s the data.

  31. [...] Great 5 part series in progress over at TBP – Home Affordability Reality Check. Part 1, Part 2. [...]

  32. [...] -Home Affordability Reality Check (TheBigPicture) [...]

  33. bulfinch says:

    “Austin is 17th at $48950 and Dallas is 25th at $47418. The median home prices (per NAR) are $379K for NYC, $193K for Austin, and $149K for Dallas. ”

    Yeah, but that median # includes all of greater Austin — meaning San Marcos/Round Rock/Leander — it’s not Central Austin. Including those low cost outliers effectively tamps down the numbers and makes affordability appear much better than it actually is in relation to median incomes. Central Austin is damned expensive.

    Medians are goofy anyway.

  34. [...] All this week, we will be looking at the Housing Recovery meme, challenging the assumptions and data that make up that argument. Monday, we began with Debunking the Housing Recovery Story. Yesterday, we did a Reality Check on Home Affordability. [...]

  35. marianlibrarian says:

    I have always been a huge housing bull, favoring smaller one-stories financed for 15 years. I like fixed costs. But property taxes inTexas are so high, always getting higher, and appraisal districts can assess you at whatever they damn well like even in the face of a professional appraisal. I am starting to think manufactured housing on an acre with septic–outside big taxing entities–will be attractive to old folks with little savings. They depreciate rapidly on the tax rolls. (But blow away in tornados.)

  36. [...] Picture, an influential finance blog, is in the midst of writing about the real estate market. In one of his posts, he wrote about this precise issue: In the real world, the home buying process begins with two key [...]

  37. beefchow says:

    “Sure, houses in the US are affordable to cash-rich Martians visiting Earth looking for a place closer to the Sun.”

    I realize that this statement was meant in pun, but, it turns out that there are indeed cash-rich ‘aliens’ looking for a place to buy in America.

    These aliens are in the form of high-wage earning (well within top 20% of American wages) Chinese and Indian high-skilled immigrants working in America on temporary work visas. The US immigration system does not provide enough permanent residence visas for this population to permanently settle down.

    I feel that opening up US immigration to highly skilled foreigners can create a productive demand for millions of homes, without the need for low interest rates or any other kind of artificial manipulations.

    Just my 2 cents… thank you.

  38. [...] -PART 2: Home Affordability Reality Check [...]