In the past, we have discussed how worthless the NAR’s Housing Affordability Index is. This weekend saw an odd column in Barron’s that was suckered in by the silliness of that index.

This suggests to me it is time to take another pass showing exactly why this index has so little value to anyone tracking housing values and affordability. let’s begin by going back to our 2008 analysis:

“The index as presently constructed is utterly worthless. It provides little or no insight into how affordable US Housing actually is. Further, what is omitted from the index is especially relevant to the problems occurring in the housing market today. The Index fails to account for — or even recognize — any of the out of the ordinary circumstances that are currently bedeviling the Housing market.”

That’s not the worst of it — during the huge run up from 2001-2007, there was but one month — ONLY ONE MONTH! — where the NAR said homes were no affordable!


Only One Month When NAR Said Homes Were Not Affordable


With that absurdity established, let’s look at what The Sunny Side of Higher Interest Rates had to say. Not surprisingly, base don this silly index, they concluded that homes are still very affordable:

“Despite alarms in the media about the crushing effects of the recent jump in interest rates, rates are still on the low side of normal, even when considered against the U.S. economy’s lackluster performance.

Start with the rise in the 30-year mortgage rate, to 4.56% from 3.74% a month ago. The hike still puts the housing affordability index at a historically high level, meaning single-family houses are still quite attainable (see chart below).


Let’s delve a little deeper into what does and does not go into the Home Affordability Index. According to the NAR:

Calculation assumes 20% down payment at current mortgage rates assuming a qualifying income ratio of 25% for PI; no assessment of buyer credit worthiness or total DTI or cash on hand.

So it assumes a down payment. The reality is that about 44% of those homeowners with mortgages have little equity, no equity or negative equity, according to Zillow. This is much higher than historical averages, thus putting this assumption at risk

Hence, this key distinction gets ignored by the NAR in the the way they frame the question and make erroneous assumptions. The issue is not whether homes are affordable, but rather “Can American families afford homes?”

As we have seen, not especially. Indeed, the buyers of many of the properties in recent quarters have not been families, but rather, huge pools of private equity, whose business model seems to be Buy-to-Rent-to-Flip. At the Pew Conference on Housing in DC last summer, attendees at Sheila Bair’s event estimated this pool of PE money was north of $25 billion dollars.

To show you just how ridiculous this datapoint is, let’s take a closer look at the series.

Here is the 10 Year Housing Affordability Index:


When Housing Was and Was Not Affordable
10 year NAR AFF index


Looking even longer term — 1989 to present – shows just how absurd the index is:

NAR HAI 1989-2013
long term NAR AFF index


1989 followed a series of rate cuts after 1987 crash. In NYC, if you bought a home then,m you did not get back to break even in the value to ~1996. Bu the home was affordable, just not a good intermediate term investment. And, this was in the midst of an 18 year bull market, with relatively plentiful jobs and credit availability. Same Unaffordable rating for 2006 with very different circumstances.

Should the NAR HAI be renamed? It seems to be better suited to telling you if a house is a good investment than if its affordable!

I still do not take the NAR’s Housing Affordability Index very seriously . . .


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

Home Affordability Reality Check  (April 3rd, 2012)


The Sunny Side of Higher Interest Rates
Gene Epstein
Barron’s, June 29, 2013

Category: Credit, 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.

17 Responses to “Housing Affordability Index: Still Worthless”

  1. BennyProfane says:

    “during the huge run up from 2001-2007, there was but one month — ONLY ONE MONTH! — where the NAR said homes were not affordable!”

    Well, I don’t know. If one can get a loan for over a half million with no money down and no job and no assets to speak of, then, sounds like a nice little home is very much “affordable”, especially when one can stop paying that mortgage and stay in the home for up to four years waiting for the sheriff to kick you out. Such a deal.

  2. Amen Brother

    Been preaching this NAR myth for years. When I think of the NAR and their great calls I think of this clip

    Another note is that if you look at this housing cycle the 20% down 740 Buyer wasn’t plentiful. Low down payment PMI loan was there. I was Bloomberg recently talking about the myth that the NAR and Bernanke promotes about tight lending standards

    The real hilarious NAR spoof this year was when 2 months ago they saw the biggest problem being that housing was stuck. No respect for housing inflation in terms of prices rising faster than income growth. Now, even the cheerleaders are complaining about MiniBubble 2.0 Action. It’s crazy here out WEST

  3. Internet Tourettes says:

    Everyone knows that NAR data and analysis is crap and I don’t understand why the press ever uses their data or even looks at their press releases. I know this is a bigger question as opposed to just poking fun at how far off base their analysis has been.

    • Alex says:

      Some bright fellow who frequents this blog once effectively stated that a substantial portion of what passes for news is merely press releases. And so here we are.

  4. [...] Ritholtz: Housing Affordability Index: Still Worthless. [...]

  5. sumnerho125 says:

    Actively selling residential real estate for over 30 years, you are correct in stating the NAR index is a cheerleading function and worthless. A couple of years ago NAR had to adjust the “unit sales” figures down by about 15%. In my market area (Yellowstone County Montana) where about 41% of the financing is FHA/VA, Assessing affordability I use median family income 2012 $64,600 / 12 = $5383 * 27% for PITI gives $1453 at present with our current sales prices figuring 100% fha financing with 26% added for taxes and insurance average sales price is $1483 and median sales price is $1340. our market is affordable yet if I used NAR method the average sales price payment would be $940 and the median $859. a total misrepresentation of the affordability within the market place. I enjoy reading you outlooks.

  6. jankynoname says:

    I completely agree with everything in here. But also, the NAR metric assumes that ACCESS to credit is constant over all periods. For example, they just use the median mortgage rate in their calcs. But the ‘median’ mortgage rate in today’s market is really just a subset of only the most high credit quality borrowers (750+ FICO). In my mind, ‘affordability’ should combine both a payments metric with an access to credit metric, since that would do a better job of telling us whether the housing market is likely to grow.

  7. RW says:

    The NAR HAI as a metric in judging investment potential seems realistic, possibly even more so if price momentum is factored in appropriately viz

    Real-estate valuation, current-account and credit growth patterns, before and after the 2008-09 Crisis

    …a real-estate appreciation of 1% in a given quarter was associated with a projected real appreciation of more than 1% in the next three quarters. This result is consistent with Shiller’s (2000) concerns regarding ‘Irrational Exuberance’ in the US in the early 2000s.

    Importantly, our results were derived in a sample of 36 countries, suggesting that Shiller’s concerns apply globally.

  8. Arequipa01 says:

    BR said in his 2008 article:

    “Further, what is omitted from the index is especially relevant to the problems occurring in the housing market today. The Index fails to account for — or even recognize — any of the out of the ordinary circumstances that are currently bedeviling the Housing market.”

    In the seventh the list of omissions is extended:

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

    There is another thing missing- both in the list and in the set of criteria used to generate the NAR HAI- that thing is that one as a borrower is entering into an agreement with an organization that is in its essence criminal. That risk vector is unrecognized and resistant to numerical description. Interaction with a racket which then pushes your paper through the MERS strainer (cheating municipal and county govts and the subsequent ‘investors’ is criminal whether the US DOJ (a wholly-owned subsidiary of Covington & Burling) thinks so or not.

    In sum, of course the NAR HAI is a flawed tool- it is designed to produce a faulty signal- noise, confusion, distraction. It’s as if a group of finance boys got together and figured how to use medieval scholastic metaphysical hokum for their proof of the existence of Mammon. And people believe. The illusion of ‘coherence’ is more than enough for most. And hell, if you put in a graph…

  9. [...] The housing affordability index is STILL worthless.  (Big Picture) [...]

  10. Lord says:

    I like the idea of renaming this a House Price Index, accompanying it with House Income Index, and arriving at a House Affordability Index from the two of them. Just don’t look for NAR to do it since they are just a sales organization.

  11. [...] NAR’s Affordability Index might more appropriately be called an investment index, noting that during the last 10 years of the index there was only ONE month in which the National Association of ….  Who are we kidding [...]

  12. Alex says:

    All this makes me wonder why journalists are just so fekkin bad at financial reporting. Its one thing to be stupid and lazy (which I believe they are), but to get repeatedly used like this is just pathetic.

    Imagine if they took the same approach to other forms of reporting. To wit…

    “Landslide win for Romney in 2012!”*

    *they asked Romney and he said so.

    “All convicted criminals are in fact innocent!”*

    *From a poll of jailed convicts in Federal prisons.

    “We Have Cloned a Unicorn!”*

    *Kim Il Sung speaks on this among many other sage topics.

  13. I’ve attempted several times to modify the Realty Bubbles Monitor to reflect Affordability instead of measuring price/family-income. Never works. It would indicate today’s fair value for the median home is $375k.

  14. [...] Unfortunately, it’s not clear that the index is very useful on its face. The index has never, in fact, dipped below 100 since the late 1990s. Even during the height of the last housing bubble, the indexes lowest score was 101—the affordability nadir hit in July 2006. This is what has led folks like Barry Ritholtz to declare the index “useless.” [...]

  15. [...] GoodPlace says: let’s not kid ourselves with feelgood statistics. And no, we are not the only ones who think that the Housing Affordability Index is worthless. [...]