Let’s take a look at how affordability is doing in the Seattle area after the last couple months of changes in home prices and interest rates.
So how does affordability look as of May? Thanks to the spring surge in home prices, we’ve dropped back below the “affordable” level of 100. The index sits at 98.8, similar to the level it was at last July and August before home prices took a seasonal dip in the fall and winter. An index level above 100 indicates that the monthly payment on a median-priced home costs less than 30% of the median household income.
I’ve marked where affordability would be if interest rates were at a more sane level of 6%—80.5. That’s lower than the level the index was at when I started this blog in August 2005 (rates were 5.8% at the time). In other words, if interest rates were anywhere near a “normal” level, we’d be well into bubble territory on home prices. Low rates are basically the only thing propping up home prices at their current levels.
Here’s a look at the index for Snohomish County and Pierce County since 2000:
Similar trend to King County, just with higher levels of affordability. The affordability index in Snohomish currently sits at 138.9, while Pierce County is at 155.6.
Later today 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 well as a bonus chart of the affordability index in the outlying Puget Sound counties.
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:
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.