Record "Housing Affordability"

Has Housing Hit Bottom?
Key Metric Says "Maybe"

Falling prices plus low interest rates equals improved housing affordability, right? Maybe. Even if it does, however, Buyers may be too gun-shy at the moment for that to matter.

According to the four local realtor associations, the Twin Cities' Housing Affordability Index ("HAI") is now at 192, the highest number since the statistic was first tracked in 1990.

What that means is the median family income in the Twin Cities is 192% of the income needed to qualify for the median priced home, using a 20% down payment and 30-year fixed mortgage.

By contrast, that number fell to as low as 120% in mid-2006. Not coincidentally, mid-2006 was very close to the peak of the housing bubble.

Watch the Numerator

So is a record-high HAI now signaling that the housing market is close to a bottom?

It depends on the wild card in the equation: Buyers' income.

In a recession, unemployment rises, and wages typically stagnate or fall. I don't compile the HAI statistics, but you'd guess that the income component of the HAI is a lagging number, and is now likely weakening along with the overall housing market.

So some consumer skepticism may be warranted.

Of course, prospective home buyers are not just backward looking, but forward-looking, too.

For now, people who are watching home prices fall and who are worried about losing their jobs clearly are listening to what their gut tells them, not their brain (and certainly not their realtor!).