Affordability Index Bounces Back Above 100

Let’s take a look at how affordability is doing in the Seattle area after the last few months of changes in home prices and interest rates.

So how does affordability look as of October? With home prices stagnating this fall and interest rates inching back down close to 4 percent, the affordability index moved back above the “affordable” level of 100. The index sits at 104.6. 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%—83.7. That’s right about where 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 still be well into bubble territory on home prices.

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

Snohomish / Pierce County Affordability Index

Both Snohomish and Pierce continue to experience much higher levels of affordability than King County, although each saw a slight dip between September and October. The affordability index in Snohomish currently sits at 133.3, while Pierce County is at 170.1.

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.

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

3 comments:

  1. 1
    Erik says:

    That would be pretty awesome to do it all over again. This time I would do what mr. Peppers did last time. Load up on auction properties as people lose their homes and sell them for a profit back to the consumer. Oh yeah, keep 10 of them as rentals. He basically picked up consumer feces and fed it back to them for a huge profit. We consumers enjoyed every scoop of poo mr. Peppers fed us and it made him a lot of money.

    That’s what I want to do this time. I want to feed consumers their own sh!t.

  2. 2
    Jonness says:

    RE: Erik @ 1 – You’re leaving out the best part. Stop making payments for 5 years while you keep renting the properties. Every time you get another $50K, run down to the auction, and pick up another cheap rental for cash. When the banks finally foreclose on the loans, you own more properties outright than you originally took loans out on.

  3. 3
    Erik says:

    RE: Jonness @ 2
    I don’t know whether to call him a scam artist or a genius. Seems like a great exit strategy to me. Well played Ray.

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