A measure of house affordability developed by the National Association of Realtors (NAR) relates median family income to median house price. (All further mention of home prices and family income refer to their median numbers.) Before looking more closely at this index, however, we first describe what has happened to home prices and family incomes in DC over the past 25 years. (The home price includes both single family and condominium units.)

**Home price and family income in DC. **DC’s housing market changed fundamentally after the year 2000. During the 1990’s, home price and family income grew at the same pace. Then, from 2000 to 2006 home prices grew much more quickly than income. The median home price rose from $198,550 to $447,850 over those 6 years, a 125.6% gain, while median family income grew only 34.5%. With the Great Recession the home price fell by 25%, but this only brought prices partway back to the growth path of family income. In the recovery period since 2009, housing prices have modestly outpaced the growth in family income (36.8% compared to 26.3%). (For more details, see the table at the end of this post.)

One way to summarize change in DC’s housing market is the ratio of median home price to median family income. The ratio was close to 3 in the 1990’s, and then shot up to about 7 in 2006.4, just before the onset of the recession. During the recession, the ratio did not fall to its previous low level, but only to about 5, where it has remained during the recovery period.

**The Affordability Index. **As noted earlier, the National Association of Realtors’ Affordability Index compares median family income with the income needed to purchase a median-priced home. The income needed to afford the median house is calculated by assuming (1) 20% down, (2) a 30-year mortgage to finance the balance, and (3) household income at 4 times the amount needed to pay the mortgage. An index over 100 means median income exceeds the amount needed to purchase the median-priced single family or condominium home; an index less than 100 means income is less than what is needed. (An index of 110, for example, means that median family income is 110% of the amount needed to afford the median home.)

The Affordability Index for DC is estimated by Moody’s Analytics. The index was 115.1 for DC in 1991 and fell sharply as housing prices rose after 2000. The index has been close to 100 for most the 7 years since the recovery from the US recession began in 2009, and was 105.4 in the last quarter of 2016.

Given that DC’s median home price increased proportionately much more than family income over the past 25 years, it might seem surprising that the 2016 index of 105.5 is not that much lower than the 115.1 index in 1991. The reason these indices are so close is that interest rates for 30 year mortgages have fallen substantially over the past 25 years. In 1991, the rate was 9.3%; in 2016 it was less than half that—3.9%.

The way the Affordability Index works, a rise in mortgage interest rates, should this occur, would lower the Affordability Index. For example, if the interest rate were to rise by a percentage point (to 4.9%), DC’s index in the last quarter of 2016 would drop to about 95 if the median house price and median family income remained the same. It should be noted, however, that housing prices can also be affected by interest rates. Low interest rates also enable families to pay more for houses, helping to drive up prices. If rates rise and people can’t afford to borrow as much, prices cannot be bid up as high.

**Comparison with the US. **In the US as a whole, housing prices and incomes were affected by developments that started in 2000, but the changes were less dramatic than in DC. Prices did not rise as sharply before the recession, and the spread between median home price and median family income never got as large. The result is that deterioration of housing affordability seen in DC has not occurred to nearly the same extent in the US.

- The ratio of median home price to median family income in the US rose only to about 4 before the recession compared to 7 in DC. The ratio in the US has now fallen back to 3.3, compared to 5.1 in DC.
- Just before the recession, the Affordability Index in the US was about 120, not too far below what it was in 1991, whereas DC’s fell to 58. The current index in the US (184) is more than 50 points above what it was in 1991, whereas DC’s is now about 10 points less than 1991.

**About this data. **Data for median housing prices, median family incomes, and the Affordability Indices for DC and the US are from Moody’s Analytics. Quarterly data for the period from the first quarter of 1991 to the last quarter of 2016 have been used to calculate 12-month moving average values for the years 1991 to 2016. Similarly, quarterly data on the interest rates for 30-year fixed-rate mortgages has been used to calculate 12-month average rates. All index numbers have been calculated using the 12-month average value for the 4th quarter of 1991 as the base value of 100. The National Association of Realtors calculates the Affordability Index for the US and regions of the country. The values of the index for DC were calculated by Moody’s Analytics.

The following tables show values and percent changes over the 1991 to 2016 period for median home prices, and median family income for DC and the US , along with the Affordability Index and the ratio of median house price to median family income.

**Note: **A version of this blog appeared in the May 2017 District of Columbia Economic and Revenue Trends, issued by the D.C. Office of Revenue Analysis.

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