Beacon Economics Home Affordability Index Indicates Housing Most Affordable in Over 40 Years

Beacon Economics Launches New Monthly Index

Oct 11, 2010, 11:30 ET from Beacon Economics

SAN FRANCISCO, Oct. 11 /PRNewswire/ -- Beacon Economics' new Beacon Economics Home Affordability Index finds that in August homes were at their most affordable level since data became available (1969). Beacon Economics developed the Beacon Economics Home Affordability Index based on the percentage of income an average family would need in order to make mortgage payments on an average priced home.

The August estimate shows the cost of home ownership (mortgage interest plus principal payments after a 20% down payment) falling to 16.9% from 17.1% in July. Overall, the Beacon Economics Home Affordability Index has remained below 20% for the past twenty-one months.

"Home affordability has reached an historic high," says Beacon Economics Founding Principal Christopher Thornberg. "Nationwide, prices are down approximately 25% from their peak, and mortgage financing rates are at all-time lows." Moreover, the high level of affordability is likely to drive demand and reduce the stock of excess inventory, ultimately resulting in the need for new housing, a rise in prices, and a pickup in new construction, according to Thornberg.

"While prices may fluctuate modestly over the next several months, we believe the worst of the housing crisis is behind us," adds Beacon Economics Research Manager Jordan G. Levine. "We expect prices to stabilize around current levels and likely be higher in the next twelve months."

Thornberg agrees. "Although there could be some modest volatility over the next several months, our research indicates the housing market is at or near the bottom," he says.

The Beacon Economics Home Affordability Index is intended to help homebuyers and policymakers alike understand the current state of the market.

The following three charts depict the Beacon Economics Home Affordability Index from January 1969 through August 2010, affordability during the same period assuming 100% financing of a home, and housing prices and year over year changes from 2000 to 2010:

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Description of Methodology: Median home price data are taken from the National Association of Realtors and are seasonally adjusted. Interest rates are based on a 30-year fixed rate conventional mortgage. The cost estimate includes both interest and principal payments and assumes that either 80% or 100% of the purchase price is financed. The monthly estimate of family income is based on annual figures from the Census through 2009 and forecasted thereafter. Note that these estimates are based on national averages. Affordability rates vary widely by region.

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Description of Methodology: Same methodology as Beacon Economics Home Affordability Index, but assuming 100% of home value financed.

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Source: National Association of Realtors

SOURCE Beacon Economics