Editors note: Chart accompanies release

TUSCALOOSA, Ala. – The Alabama Housing Affordability Index for the first quarter of 2005 remained virtually unchanged from the fourth quarter of last year, according to figures from the Alabama Real Estate Research and Education Center at The University of Alabama.

The index increased three-tenths of one percent to 179.5, compared to 179.2 for the last three months of 2004.

“Basically, the growth in income for the first quarter offset the increase in home prices registered during this period,” said Dr. Leonard V. Zumpano, director of the real estate research center. “Financing costs had no effect on housing affordability statewide as mortgage interest rates increased only 2 basis points – two tenths of 1 percent during the first quarter.

“Although it is encouraging to see that housing affordability remained stable despite rising home prices, the statewide index is down 20 percentage points from the high of 200 that was set during the first quarter of 2004. This indicates that home prices have been increasing faster than family income over most of the last two years,” Zumpano said.

The statewide housing affordability index is calculated as the ratio of the state’s actual median family income to the income needed to purchase and finance the state’s median price home. An index number of 100 means that a family earning the state’s median income has just enough buying power to qualify for a loan on the state’s median priced, single-family home, assuming standard underwriting criteria.

The construction of the index number assumes a 20 percent down payment to allow comparison of housing affordability in Alabama to the U.S. The higher the index number, the more affordable is the housing.

An AHAI of 179.5 means that Alabama families who earn the statewide median income of $48,650 had almost 1.8 times the income needed to qualify for a loan to purchase the statewide median priced home, which was $120,425 in the first quarter. Stated differently, a family earning the statewide median income of $48,650 could have qualified to purchase a home valued at $215,800.

The center said housing affordability increased in eight of the state’s 11 metropolitan areas and declined in the remaining three. In five of the locations housing affordability increased because median home prices declined. In the other three metro areas – Birmingham, Montgomery, and Tuscaloosa – housing prices rose, but the depressing effect of rising prices on housing affordability was more than offset by increased family income in these locations.

According to the center, the only Alabama location that appears to have an affordability problem is Baldwin County with an index number of 107.6.

“This number has to be interpreted with care as it primarily reflects the very significant run up in prices for beachfront and vacation properties along the Gulf Coast,” Zumpano said. “Many of these buyers live outside Baldwin County and although they tend to be more affluent than most county residents, their incomes are not included in the county’s median income.”

At the national level, housing affordability increased to 136.5 during the first quarter of 2005, up seven percentage points from the fourth quarter of last year. Rising family incomes pushed up the affordability index number by helping to offset rising home prices.

Housing affordability peaked at the national level, as was the case in Alabama, during the first quarter of 2004 at 144.8.

Will the remainder of the year see a continuing decline in housing affordability? “The consensus answer to this question is yes, if home prices continue to appreciate at current rates,” Zumpano said.

He noted that in some locations labeled as “bubble markets,” home prices have gone up more than 50 percent during the last three years and housing affordability has been seriously eroded.

“In many of these markets consumers have purchased homes using interest only loans from sub-prime leaders as this has been the only way they could afford to get into the housing market,” Zumpano said. “These markets will be particularly sensitive to any shock to the economy, and home prices could tumble. In Alabama, price appreciation has been much more modest and in most locations housing remains very affordable.”

The Alabama Real Estate Research and Education Center is part of The University of Alabama’s Culverhouse College of Commerce and Business Administration. The UA business school, founded in 1919, has been recognized repeatedly for offering a high-quality, cost-effective education.