When you look at the National Association of Realtors data, we could be heading into a severe deflationary period for Real Estate. However, let's look at that closer, specifically the HAI, which stands for Housing Affordability Index. An HAI of 100 means that a family with the median income has enough income to qualify for a median-priced home, assuming a 20% down payment. If the HAI is 120, that means the median income household has 120% of the income needed to purchase a median-priced home. The calculation also assumes a qualifying ratio of 25%, which means Principal and Interest payments cannot exceed 25%.HAI is a lagging indicator, meaning we won’t see today’s data for 2-3 months but looking at the trends can provide a glimpse into the future of what may happen with the national inventory. Below you will see a graph of the national data on HAI.
The data suggest that in July, we started to see median home prices decrease by around 2.5%. But for the following analysis, let's assume prices remain the same in September/October, as well as median home prices and income as we saw in July. Finally, we will use the 6.82% interest rate that was the national average as of September 29th, 2022. Using these metrics, let's calculate today’s HAI.
As you can see from the numbers above, if all stayed the same as July in October, we would be an HAI of 88.65. On average, the typical American family could not qualify for a home without being cost-burdened. As we tick that median home price down, we see HAI creep up. What does this tell us? To get back to an affordability index of 100, homeowners can purchase homes without being overburdened; median prices would need to decrease 11.4% today to be back into the affordable range.
Does this suggest we expect a rapid decline of around 11.4% before demand picks up again? Although it may be too early to tell where the market will settle and much it will rely on FED policy and macro-economic numbers, as we propel forward, it certainly appears that the market needs a minor correction to bring back regular retail demand. What do you think? Share your thoughts in the comments below.
Jackson Rohde is a General Partner at Above 8 Capital LLC and a long-time veteran realtor in Western Wisconsin. The thoughts in analysis in this article reflect his personal opinions, not those of the company. Data here should be considered informational only and not taken for financial or investing advice.
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