Affordability Index Falls Below 100, Hits 4-Year Low

Affordability Index Falls Below 100, Hits 4-Year Low

As volatile as interest rates and home prices have both been this year, I thought it would be good to make the affordability index more of a regular post.

So how does affordability look as of July? Not great. The index fell below 100 (i.e. the median-priced home is affordable to a median-income household) for the first time since July 2009.

King County Affordability Index

I’ve marked where affordability would be if interest rates were at a more sane level of 6%. An affordability index of 82.0 is once again below where the index was in August 2005 when I first started Seattle Bubble (rates were 5.82% at the time), but is still quite a bit above the low point in the 60s that the index hit in 2007.

I still expect this rapid deterioration in affordability to put the brakes on the price increases we’ve seen over the last year or so.

Here’s a look at the index for Snohomish County and Pierce County since 2000:

Snohomish / Pierce County Affordability Index

Snohomish County’s affordability index is at its lowest point in 43 months, while Pierce County’s index is only at a 29-month low.

Next week I’ll post updated versions of my charts of the “affordable” home price and income required to afford the median-priced home. Hit the jump for the affordability index methodology.

As a reminder, the affordability index is based on three factors: median single-family home price as reported by the NWMLS, 30-year monthly mortgage rates as reported by the Federal Reserve, and estimated median household income as reported by the Washington State Office of Financial Management.

The historic standard for “affordable” housing is that monthly costs do not exceed 30% of one’s income. Therefore, the formula for the affordability index is as follows:

Affordability Formula

For a more detailed examination of what the affordability index is and what it isn’t, I invite you to read this 2009 post. Or, to calculate your the affordability of your own specific income and home price scenario, check out my Affordability Calculator.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

25 comments:

  1. 1
    Erik says:

    Uh oh, maybe Matthew was right? If they raise interest rates, we all may be in a world of hurt. I read that the feds are planning to raise rates next month. If that happens, I would think housing prices will decrease and inventory will decrease.

    Rate this comment: Thumb up 0

  2. 2
    SMW says:

    Brakes are officially on…..now time to put this baby in reverse for awhile.

    Rate this comment: Thumb up 0

  3. 3
    mike says:

    Looking at the Pierce County index alone, homes there never became particularly unaffordable yet that county saw some of the greatest price declines in the region.

    Rate this comment: Thumb up 0

  4. 4
    Ron says:

    So now inventory should increase which is good for buyers. Nothing wrong with that.

    And don’t forget, people who have violent love four times or more a week make more money!

    http://goo.gl/yXQt7r

    Rate this comment: Thumb up 0

  5. 5
    Lo Ball Jones says:

    People who had money in the bank and could just pay full price cash for what they wanted are gone.

    Now we’re back to plain old Mr. 30 Year Mortgage.

    He need a bargain.

    Rate this comment: Thumb up 0

  6. 6
    Greg says:

    I’ve just listed a condo and was trying to determine what to list it at. Many realtors suggested #’s I thought were too high. I decided to list low based on what I perceive and a sudden inventory spike. (I’m seeing lots of for sale signs popping up in the area (Queen Anne)). The logic used by many realtors I talked to were that prices will probably still increase YOY by 5% or more (Zillow predicts 8% YOY increase). This seem absolutely crazy to me. I don’t know how any validity could be put to a YOY projection during such volatile times.

    I guess it is a consensus on this forum that we’ve peaked or nearly peaked?

    Rate this comment: Thumb up 0

  7. 7
    wreckingbull says:

    Is the term ‘violent love’ really worse than the term ‘violent love’? WTF?

    Rate this comment: Thumb up 0

  8. 8
    David Losh says:

    Wow, this doesn’t look good.

    It seems to me with each of these last few posts we may be in for a housing price correction.

    Rate this comment: Thumb up 0

  9. 9
    JWS says:

    RE: Erik @ 1

    “I read that the feds are planning to raise rates next month”

    Next month the Fed is expected to announce a reduction in the $85 billion/month bond buying program, not increase rates. The federal funds rate is expected to stay at 25 basis points for quite awhile longer. Bill Gross said yesterday he expects 2016 or later for a rate increase.

    http://www.bloomberg.com/news/2013-08-14/fed-to-keep-funds-rate-on-hold-longer-than-forecast-gross-says.html

    Rate this comment: Thumb up 0

  10. 10
    Erik says:

    RE: JWS @ 9
    Thank you for clearing that up for me. I thought that meant interest rates would increase. Doesnt that mean banks will raise rates though?

    Rate this comment: Thumb up 0

  11. 11
    Blurtman says:

    RE: JWS @ 9 – If bond demand decreases, what happens?

    Rate this comment: Thumb up 0

  12. 12
    Matthew says:

    Erik,

    Shhhhh… Don’t wake the baby! Now listen young padwan:

    Bubbles in the air, bubbles everywhere. Bubbles high, bubbles low, time to sell your Juanita condo. Sell now before it’s too late, free advice, ain’t that great?

    Rate this comment: Thumb up 0

  13. 13
    Chris says:

    Tim,

    Is there a way to track what percentage of homes were paid for with cash in this area, rather than financed with traditional mortgages? I’d like to see when/if the change in interest rates (and “affordability”) correlates to investors entering and leaving the market in King County.

    Rate this comment: Thumb up 0

  14. 14
    Erik says:

    RE: Matthew @ 12
    Ha ha. Good job on calling the top. It hasn’t all played out yet, but it looks like you called it again.

    Rate this comment: Thumb up 0

  15. 15
    JWS says:

    RE: Erik @ 10

    “I thought that meant interest rates would increase. Doesnt that mean banks will raise rates though?”

    Yes, mortgage rates will increase when the Fed reduces the $85 billion/month bond buying, but this is an entirely different act than the Fed raising the federal funds rate (which would have a much bigger impact and is not likely to happen anytime soon).

    These two acts may be considered similar to some people, but they are actually entirely different and I think it’s important to know about both. Just giving my 2 cents…..

    Rate this comment: Thumb up 0

  16. 16
    Erik says:

    RE: JWS @ 14
    I use to have the equation on my desktop a few years back. It was something like… interest rate = federal funds rate + what banks add to mitigate risk. Reducing bond buying somehow increases the “what banks add to mitigate risk” bucket. Therefore as a consumer, less bond buying increases interest rates. This is bad for the economy and potentially bad for housing prices.

    Rate this comment: Thumb up 0

  17. 17
    David Losh says:

    RE: JWS @ 9

    “Quantitative easing is a tired horse which has inflated asset prices, but does little to stimulate real growth,” Gross said.

    Thanks for posting a great article that makes the distinction of the tools the Fed has.

    This is kind of off topic, but still interesting to me in terms of affordability.

    I’m wondering how many people are now working two part time jobs in order to make mortgage payments. How many people have held onto properties because they saw this past run up in property prices? Last would be if people will be disappointed in the home purchase they made when the Fed first, stops buying bonds, and second, raises the rates in 2016?

    Rate this comment: Thumb up 0

  18. 18
    patient says:

    Last time affordability dropped it was doing so in tandem with some of the biggest home price increases ever seen which makes sense. Higher prices without higher incomes causes lower affordability and then pop. Now, has people learnt to shy away in these circumstances and we will see a quick cooling or will it trigger another mania? Really hard to say. We’ll see.

    Rate this comment: Thumb up 0

  19. 19

    RE: patient @ 18
    I don’t know. But I’m usually looking for some “invisible hand”.
    Ten years ago, the aim was to increase the percentage of homeowners, because home ownership was seen as something that benefitted both home owners and the community in general.
    Now, affordability is way down. Total employment may be increasing, but mostly in low paid jobs. And they’re building apartment buildings like crazy.
    So…was this push ten years ago to get more people to become home owners really because of the societal benefits? Or was there some money to be made? And how about now? There doesn’t seem to be big push to increase the percentage of home owners. Is it because of the large number of defaults a few years ago? Or is it because ” the big money” is into apartment buildings right now?

    Rate this comment: Thumb up 0

  20. 20
    drshort says:

    By Erik @ 16:

    RE: JWS @ 14
    I use to have the equation on my desktop a few years back. It was something like… interest rate = federal funds rate + what banks add to mitigate risk. Reducing bond buying somehow increases the “what banks add to mitigate risk” bucket. Therefore as a consumer, less bond buying increases interest rates. This is bad for the economy and potentially bad for housing prices.

    The fed funds rate has little to do with mortgage rates. Mortgage rates tend to closely track the 10 year treasury plus about 1%. One would think that the Fed buying all the newly issued MBS securities with QE3 would be driving down the spread between treasuries and mortgage rates, but I don’t think thats been happening. We’re still seeing something close to that 1% spread. My guess is that the market is looking past this short term Fed action and pricing in what might happen if the Fed starts selling all the MBS they’ve been buying with QE3.

    Rate this comment: Thumb up 0

  21. 21
    Attorney says:

    I don’t think the affordability index is very useful. Median income-median price is too rough of a metric to say much of anything. The rich are getting richer. Everything is cheap regardless of YOY.

    Rate this comment: Thumb up 0

  22. 22
    toad37 says:

    RE: Greg @ 6

    I just sold my condo that I bought 2 years ago in downtown Bellevue. Chinese buyers, all cash. Not sure if it’s the top but I’m more than happy to step aside for a while and get a fresh perspective.

    Rate this comment: Thumb up 0

  23. 23
    Ron says:

    RE: wreckingbull @ 7

    Some sort of malware attached that crazy statement to the post. I tried to delete the post but the delete function on this site doesn’t seem to work.

    Cheers…

    Rate this comment: Thumb up 0

  24. 24
    David Losh says:

    RE: Ron @ 4

    What amazes me is this comment got three thumbs down.

    Rate this comment: Thumb up 0

  25. 25
    Erik says:

    RE: toad37 @ 22
    Good job. You hit it just right it seems.

    Rate this comment: Thumb up 0

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