The Real Estate Center's two Texas housing affordability indexes are useful online tools for anyone in housing-related professions. Both show homeownership generally remained affordable over the past five years.
Housing affordability has been a growing concern for Texans over the past decade, especially for those looking to enter the housing market.
The Real Estate Center tracks affordability across the state, in Metropolitan Statistical Areas (MSAs), and in a number of select counties with its Texas Housing Affordability Index (THAI) and First-Time Homebuyers Affordability Index (FTHAI). Both indexes measure the ability of a household earning the annual median family income (MFI) to qualify for a home purchase loan for a median-priced home, and both are produced quarterly and annually. They can be accessed at www.recenter.tamu.edu/data/housing-affordability.
Individuals in multiple professions—from real estate agents and developers to urban planners and governmental officials—can use the THAI and FTHAI in a myriad of ways, including to:
- assess housing affordability for a particular geography within a single point in time or track changes in affordability within that geography over time,
- compare affordability between different geographies (whether for a single point in time or over an extended period), and
- compare affordability for first-time homebuyers to that of all homebuyers.
How the Indexes Work
The Center computes the indexes for 45 geographies—Texas, 24 MSAs, two metropolitan divisions, and 18 counties (see Table 1).
The THAI and FTHAI reflect the relationship between the MFI in a locale and the computed income required to purchase the median-priced home. The required income is derived from the current mortgage interest rate, the down payment, and the lender's required mortgage debt-to-income ratio, or qualifying ratio.
The MFI can vary based on family size. The variations in income are used to determine appropriate rent levels for families participating in affordable housing programs. However, the MFI used in the THAI calculation is the “overall" MFI calculated by the Department of Housing and Urban Development (HUD). The overall MFI value is considered to be the median.
Median household income (MHI) is another frequently discussed income measure. Households include one or more individuals living in the same housing unit who are single, divorced, widowed, or cohabitating with a partner or roommate(s). Alternatively, families are defined by two or more individuals living in the same housing unit who are related by birth, marriage, or adoption. The THAI uses the MFI because the incidence of homeownership is generally higher among families than other types of households.
An affordability index ratio of 1.00 indicates the MFI is exactly sufficient to purchase the median-priced home. A ratio above 1.00 means the MFI exceeds the required income. In other words, a family is better able to afford the median-priced home. Conversely, a ratio below 1.00 indicates the MFI is not sufficient to purchase the median-priced home.
In percentage terms, a ratio of 1.10 indicates the MFI is 10 percent more than the required income to purchase the median-priced home. A ratio of 0.90 indicates the MFI is 10 percent less than the required income.
The THAI and FTHAI use the quarterly median price for single-family homes, townhouses, and condos (both new and existing) sold through Multiple Listing Services in Texas to calculate the required monthly mortgage payment. MFI figures are obtained from HUD and the Federal Financial Institutions Examination Council.
The equation to calculate both the THAI and FTHAI is:
Index Value = annual median family income / required annual qualifying income for a mortgage
The annual income required to qualify for a mortgage loan is equal to the required monthly mortgage payment times 12 months divided by the qualifying ratio. The qualifying ratio is a measure of the annual mortgage payment to the borrower's annual gross income. For example, a qualifying ratio of 25 percent means that the monthly mortgage payment (principal and interest) times 12 cannot exceed 25 percent of the borrower's annualized gross monthly income.
A lower down payment will increase the required qualifying income, reducing affordability, and vice versa. The standard calculation for the THAI uses a down payment of 20 percent (i.e., a loan-to-value ratio of 80 percent) and a qualifying ratio of 25 percent.
The underlying assumptions used to calculate the FTHAI differ slightly from those used to calculate the THAI. The first-time buyers' home price is assumed to be 70 percent of the overall median home price. The required monthly mortgage payment is based on a 90 percent loan-to-value (LTV) mortgage using the interest rate appropriate for the area. Like the THAI, the qualifying ratio for the FTHAI is 25 percent.
One-half of a percentage point is added to the nominal interest rate used in the THAI to calculate the FTHAI. The increase in the borrowing rate accounts for private mortgage insurance (PMI) required by the lender for down payments of less than 20 percent as well as the higher borrowing costs associated with a higher LTV. The MFI for first-time homebuyers is assumed to be 65 percent of the overall MFI.
Actual loan-to-value and qualifying ratios will vary among borrowers depending on the financial status of the borrower and the lender's assumed level of risk.
Recent Change to Interest Rate Data in Indexes
The Center recently revised both indexes to include a different source of mortgage interest rate data. Previously, data for both indexes were derived from the monthly interest rate survey produced by the Federal Housing Finance Agency (FHFA). However, the FHFA published mortgage data for only three geographies in Texas (Dallas, Houston, and San Antonio) on a quarterly basis. Interest rates for the remaining geographies were based on their proximity to one of the three MSAs. In May 2019, this survey was discontinued “due to dwindling participation by financial institutions."
The Center now uses mortgage interest data provided by CoreLogic. Unlike the FHFA, CoreLogic publishes quarterly interest rate data for all 45 geographies included in the indexes.
Mortgage rates in the original FHFA dataset included any discount points, origination fees, and other up-front costs such as mortgage insurance premiums, producing an “effective" rate. Interest rates used in the revised indexes from CoreLogic reflect a nominal (contract) mortgage interest rate that does not consider these factors.
Overall, changing from the FHFA effective rate to CoreLogic's contract rate had little impact on the indexes previously reported (see Figures 1-5 and Tables 2-6). During the past five years, the values for the state's three major MSAs and two metropolitan divisions (the Dallas-Fort Worth-Arlington MSA is divided into two metropolitan divisions) typically changed only a few hundredths of a point.
For example, in Austin in 3Q2015 the mortgage interest rate using the original FHFA data source was 4.06 percent. CoreLogic's rate was 4.21 percent. The THAI and FTHAI measured 1.6 and 1.24, respectively, based on the FHFA rate, while the revised indexes based on CoreLogic's rate measured 1.57 and 1.22, respectively.
Generally, depending on the original value of the indexes, the interest rate would have to change by one or two percentage points to substantially change the values of the THAI and FTHAI. In the Austin example, the interest rate would need to exceed 6 percent for the FTHAI to dip to 1.00.
For more discussion on the effects of mortgage interest rates on affordability, read “How Much Home Can a Household Afford?”
Dr. Hunt (firstname.lastname@example.org) is a research economist and Losey a research intern with the Real Estate Center at Texas A&M University.