The Housing Affordability Index in Dakota County (and the rest of the Twin Cities) is at an All-Time High this month. At the end of December 2011, the index hit a mark of 264 which is 8.6% above this time a year ago.
What Is The Housing Affordability Index
The Index was developed in 1971 to measure whether the typical family can afford to qualify for a mortgage on a typical home. It’s really a measure of 3 primary factors -
- Average Home Prices
- Median Incomes
- Interest Rates
This definition is available from the National Association of Realtors -
a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite HAI of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the HAI, then, shows that this family is more able to afford the median priced home.
In other words, the Index assumes a 20% downpayment which isn’t always typical these days but an FHA loan allows for a 3.5% downpayment and is very popular right now.
Impact On Dakota County Residents
Dakota County has continued to see home prices drop while interest rates have continued at near record low levels. This combination has driven the Housing Affordability Index ever higher.
The index of 264 means that the typical family has 264% of the income they need in order to qualify for a loan to purchase the median priced home in Dakota County. Basically, they would have no problem qualifying as they would have plenty of income to meet standard mortgage acceptance measures and could likely qualify for a house much more expensive than the median price. The median priced home in the Twin Cities declined to $145,000 in December.
Median Mortgage Payment
Another way to look at the Housing Affordability for Dakota County residents is to look at how much of a households income would be eaten up by the median mortgage payment. As you can see below (in this national number) the average household’s mortgage payment fell to around 15% of their income which means that people can spend a lot less of their income on housing and hopefully allow them to save more money.
This graph is from ADS Analytics
Buy vs. Rent
This all ties in quite a bit with feedback I’m getting from many potential first time homebuyers in the past couple months who are considering buying their first home. They are seeing that it’s cheaper to buy vs. rent (as I wrote about last May), especially as rental rates go up in the face of low rental availability.
Housing Affordability Conclusion
With this combination of low prices, low interest rates and higher rents it may be the right time for Dakota County residents to explore their options. Many people start by finding a Realtor and then getting qualified by a lender. You can contact me and we can get started.
Bill Wallace is a Realtor at RE/MAX Results in Apple Valley, MN with a focus on Dakota County and the Southern Twin Cities including – Apple Valley, Bloomington, Burnsville, Eagan, Farmington, Inver Grove Heights, Lakeville, Mendota Heights, Prior Lake, Richfield, Rosemount, Savage, Shakopee, South St. Paul and West St. Paul. He is licensed to practice real estate in both Minnesota and Wisconsin.
