Market Insights

What Does a Housing Affordability Index Mean for Individual Buyers?

Family in their kitchen discussing the housing affordability index and how it affects the housing market

Economists rely on housing affordability indices to understand how consumers are transacting in the housing market, but these indices may be inaccurate when it comes to determining how easily homes can be obtained.

Groups like the National Association of Realtors publish housing affordability indices that measure whether the typical American family in a particular region can qualify for a mortgage loan based on average income and recent price data. While these services use the term “affordability,” additional factors beyond income and price will impact whether or not you can afford a house.

Individual affordability is a much broader concept. Consider how your unique situation applies to both the market as a whole and your financial status.

The Index and You

It’s important to understand that indices address general trends. By definition, they cannot determine whether you individually can get a house. A high affordability index is never a guarantee that it’s the right time to buy a home or even that you can access the necessary credit.

Think of these indices as rain gauges: They can tell if you if it’s been raining outside, but they can’t say whether or not you’ll get wet.

Job Losses and Home Prices

Employment is one of the biggest factors that makes an affordability index less useful for your specific case.

In 2014, according to Trulia, the average home price in San Francisco is just under $1.5 million, while the average price for a home in Providence, Rhode Island is slightly above $410,000. An affordability index would likely consider Providence to be a great deal, but job factors may play a bigger role in your experience.

What if you live in Rhode Island and are among the roughly 9.4% of unemployed residents in May 2014? Compare that to San Francisco, with a 6.0% unemployment rate. These unemployment rates contribute a factor that indices may miss: Unemployed people don’t buy houses, so a high unemployment rate can drive down home prices.

Even when published unemployment rates drop below double digits, the U-6 index of people marginally attached to the labor force tells a different story. As people re-enter the workforce, they may work only part-time or return at lower salaries than when they were forced out. In general, this results in low affordability even if home prices have decreased; after all, groceries and other necessities didn’t drop in price and are now consuming a larger portion of that lower paycheck.

It may seem obvious, but your personal income plays the largest role in what you can afford.

If you’re employed, you’re in a better position to get a home in an area with higher unemployment. If you never left the job market, or have maintained a high salary while many recently employed people have taken a pay cut, you’re also in better shape for personal affordability, regardless of what an index may say.

Rates Are King

Everyone wants a deal that results in paying less than the going rate. This is your best look at affordability for your situation.

When your potential monthly payment on a new home goes up, whether it’s due to general rate increases or the paying of points, your affordability goes down. Consider not only price, but also your access to credit—and don’t let an index alone dictate your buying decisions.

Affordability indices may display a good insight into investing in a refinance or a new home, but the rate you pay should be the ultimate deciding factor. If an index seems to indicate a good time to buy, ask your lending partner to explain what affordability means for you and what you can buy based on your access to credit.

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