Editors note: Chart accompanies release

TUSCALOOSA, Ala. - The Alabama Housing Affordability Index for the third quarter of 2005 declined 7 percentage points from the second quarter, the second consecutive decrease in the index this year, according to The University of Alabama’s Real Estate Research and Education Center.

After setting a record high during the first quarter of 2004, Alabama’s Housing Affordability Index has fallen 41 percentage points, from a high of 200 to the current level of 158.7. The double digit increases in home prices that have occurred (in the metro areas tracked in this study) over the last two years have more than offset the growth in household income and record low mortgage interest rates, causing the housing affordability index to decline.

Statewide median home prices are up 11 percent from the same time last year. From the first quarter of 2004 existing home prices in Alabama have increased by 26.6 percent. In contrast, median household income has only increased 3 percent since the first quarter of 2004.

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 priced 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 higher the index number is, the more affordable the housing.

An AHAI of 158.7 means Alabama families who earn the statewide median income of $48,650 had almost 1.6 times the income needed to qualify for a loan to purchase the statewide median priced home, which was $130,030 in the second quarter. Stated differently, a family earning the statewide median income of $48,650 could have qualified to purchase a home valued at $215,067.

According to the real estate center, the numbers used to compute the HAI reflect mostly urban areas, which have much higher income levels than rural areas in the state.

“Households earning less than the median income are finding it much tougher to find safe and affordable housing, especially in some of the more expensive markets,” noted Dr. Leonard Zumpano, director of the UA center.

Within Alabama, housing affordability fell in eight of the state’s 11 Metropolitan Areas and in four of the five non-metro area counties included in the affordability index. Housing affordability increased in the remaining areas because median home prices declined, while in all other locations existing home prices rose.

Although housing affordability fell throughout most of Alabama, two counties, Baldwin and Tallapoosa, warrant special attention, Zumpano said. In Tallapoosa County HAI fell from 87.9 in the second quarter to 77.4 in the third quarter. The HAI in Tallapoosa County fell below 100 for the first time during the third quarter of 2004 and has been below 100 for the last six months of this year. In Baldwin County the HAI has been hovering around 100 all year long.

“In both these locations the housing affordability index must be interpreted with care,” Zumpano said. “The high median home prices reported for these areas reflect the double digit price increases that have occurred for vacation properties along the Gulf and for homes that front Lake Martin in Tallapoosa County. Many of the buyers who own such properties do not live in either of these areas and tend to be more affluent than county residents. Since they are not year-round residents, their incomes are not included in the county median income numbers, causing a much greater downward distortion in the affordability index than would otherwise be the case.”

Nationally, housing affordability declined again in the third quarter, falling from 122.3 in the previous quarter to 117.8. National median home prices increased this quarter by 3.2 percent to $216,667; that plus slowly rising interest rates caused the decline in housing affordability. Housing affordability at the national level, just like Alabama, peaked in the first quarter of 2004 with an HAI of 144.8, and has been mostly decreasing since, coming perilously close to the just affordable 100 index number.

The short-term outline looks for continued erosion in housing affordability, Zumpano said. “The Federal Reserve is still raising short-term interest rates, and this will continue to slowly, but steadily, push up long-term mortgage rates.” Zumpano said this will, in turn, cause housing affordability to decline for the remainder of the year.

“Up until quite recently, very low mortgage rates and a tight supply of available homes worked to push up home prices,” he said. “Rising long-term interest rates, coupled with increasing home prices, should slow housing demand.

‘Existing home sales slowed nationwide and in Alabama during September. Supply now seems to be catching up with demand, which should help moderate future home prices as we move into next year.”

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.

Tara Rich, Faculty Scholar, contributed to this report

Visit us on the Web at www.arerec.cba.ua.edu