Affordability Index Falls To Early 2005 Levels

You can get access to the spreadsheets used to make the charts in this and other posts by becoming a member of Seattle Bubble.

With all of the first quarter behind us, and the question of whether or not we’re in another real estate bubble here in Seattle on everyone’s minds, let’s take an updated look at our affordability index charts for the counties around Puget Sound.

As of March, affordability has now fallen to its lowest level since November 2008, and as has been the case for quite a while, it would be considerably worse if not for the current absurdly low interest rates.

Median home prices have already begun their annual spring bump, while interest rates have ticked up slightly. The affordability index for King County currently sits at 90.7. An index level above 100 indicates that the monthly payment on a median-priced home costs less than 30% of the median household income.

King County Affordability Index

I’ve marked where affordability would be if interest rates were at a slightly more sane level of 6 percent—74.0, which is worse than any point outside of early 2006 through late 2007.

If rates went up to a more historically “normal” level of 8 percent (the average rate through the ’90s), the affordability index would be at 60.4—five points lower than the record low level in July 2007.

What if rates were at 6.7 percent, the same level they were at in July 2007 when the affordability index bottomed out at 65.2? At that rate with today’s home prices and incomes, the affordability index would currently be 68.7.

In other words, ridiculously low interest rates are still the only thing propping up affordability in the Seattle area.

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

Snohomish / Pierce County Affordability Index

The affordability index in Snohomish currently sits at 118.1, while Pierce County is at 132.1. Both down considerably over the last few years.

In other affordability-related news, Zillow subsidiary Trulia recently released their own version of an affordability calculator. It is broken and gives terrible advice. Do not use it. If you adjust the interest rate, the calculator breaks. If you adjust the property tax rate, the calculator ignores the new value. They also claim that spending up to 36 percent of your income is “affordable,” despite years of precedent that “affordability” means not spending more than 30 percent of your income. I’m shocked that such a broken and misleading tool was published.

My own simple affordability calculator doesn’t have a lot of fancy features or the prettiest interface, but at least it works.

Tomorrow I will 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.

Outer Puget Sound Counties Affordability Index

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.

254 comments:

  1. 251
    Nicole G says:

    Hi, Is the capital gain tax a new thing since 2007? That could be a factor for the people that bought in 2015. If it wasn’t for that my husband and I would have listed our house in Kent. We have to wait till November. We plan to keep the money gained and wait it out. I will say the rents are pretty scary though.

  2. 252
    30sballarddad says:

    The methodology for calculating “household affordability” has flaws for high wealth areas. The calculation does not take into effect financial assets, only income. Essentially, buyers dip into their other assets to buy a house. That is why “affordability” is always so low in zip codes with high net worth. Which is of course bad for most most folks who don’t have trust funds, or inherited large amounts of money, or made substantial sums of money from company stock (in Seattle likely from a certain company).

    I had a friend who wanted to buy a nicer house than mine a block away (larger, water views, recently remodeled). My friend and his spouse both have very high paying jobs and we were excited to have them move near us.

    They were outbid by almost $200K (and had the 3rd best offer). Met the new neighbors, who were really nice folks and have kids similar to age to mine. Part-way through the pleasantries, “oh, amazon, 9 years, great.”

  3. 253
    30sballarddad says:

    RE: softwarengineer @ 37 – What are you talking about? $50,000 average income people live in Tacoma, not Seattle

  4. 254

    [Topic: Taxes]

    By Nicole G @ 251:

    Hi, Is the capital gain tax a new thing since 2007? That could be a factor for the people that bought in 2015. If it wasn’t for that my husband and I would have listed our house in Kent. We have to wait till November. We plan to keep the money gained and wait it out. I will say the rents are pretty scary though.

    The capital gains tax is not a new thing. I remember learning how to net long term and short term capital gains back in about 1982. They did change how you deal with gain from the sale of a house, but that too was well prior to 2007.

    I don’t really understand the rest of your post or why you’d need to wait until November for any tax reason, unless maybe you’re trying to take advantage of the tax free provisions for residences. I would suggest you contact a tax adviser so that you don’t get any surprises (or don’t wait longer than you have to).

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