Weaknesses of Housing Affordability IndicesUsed by Practitioners

Document Type

Article

Journal/Book Title/Conference

Journal of Financial Counseling and Planning

Volume

21

Issue

1

Publication Date

2010

First Page

43

Last Page

52

Abstract

The subprime mortgage and foreclosure meltdown of 2007-2008 emphasized the need for a re-conceptualization of measures of an individual household’s ability to afford housing. A clear link needs to be established between what a household can afford and the loan amount for which a household qualifies. This paper provides a conceptual review of three commonly used housing affordability indices in the United States: (a) the Department of Housing and Urban Development (HUD) Affordability Index for homeowners and renters; (b) the National Low Income Housing Coalition Affordability Index for renters, also known as Housing Wage; and (c) the National Association of Realtors Affordability Index for homeowners. The review of measures showed a lack of ability to easily adapt housing affordability measures to individual households. Discussions on issues related to housing affordability measures are presented, including market affordability verses individual affordability, the residual income approach, and housing affordability and transportation costs. The authors recommend that housing practitioners utilize an adapted residual income approach that considers household size, geographic location, transportation, and non-housing related expenses, rather than standard affordability measures or qualifying guidelines. The authors also recommend that researchers and policy makers review qualifying ratios and make appropriate changes to better determine an individual household’s ability to afford housing.

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