House Prices are Stretching the Affordability Index

It hasn't been this difficult to afford a used home in metropolitan Phoenix since 1990.

Rising Valley home prices continue to outpace income gains, making it tougher for buyers to find houses that don't stretch their budgets.

The area's housing affordability crunch will likely worsen this year when interest rates finally start to climb. If home prices continue to increase, the affordability crunch could become more serious.

The reading on a key affordability index for existing homes published by Arizona State University's Arizona Real Estate Center fell to 114 at the end of 2004, its lowest level in 15 years.

"Interest rates were stable, but monthly payments went up with prices," said Jay Butler, director of the Real Estate Center.

The median price of a used Valley home climbed 22 percent during 2004 to hit a record $190,000 in December, according to the Real Estate Center. Easing the crunch a little was a drop in the average mortgage rate for Phoenix-area home sales. It went from 5.7 percent in 2003 to 5.5 percent last year.

ASU's affordability index measures whether a typical buyer can afford a median-priced house at the prevailing interest rates. An index value of 100 or higher means the average buyer can afford a house. Anything below 100 means a city's typical household can't afford one of its average homes.

The index is based on Greater Phoenix's median household income, the area's median home price and the average interest rate. Overall, Valley household incomes inched up less than 2 percent to reach $49,500 last year.

Rising values are good news for sellers but not for buyers, especially first-timers who can't afford $50 to $100 more a month that higher prices and interest rates can tack onto a mortgage payment.

But despite the Valley's sagging affordability, new- and used-home sales broke records in 2004.

Out of state buyers are pushing sales and prices, say real estate agents and analysts. Investors from pricier housing markets such as California, the East Coast, Chicago and Las Vegas bought a record number of Valley houses in 2004, according to property records.

In Phoenix, new home prices are typically higher than used home prices so that index is always lower.

The median price of a new Valley home hit $211,640 in December, a 19 percent jump from January of last year. ASU's new home affordability index fell to 102 last year, after hitting a 17-year high of 113 in both 2003 and 2002.

Despite the run up in metropolitan Phoenix home prices, the Valley is still considered relatively affordable by national standards. The median U.S. existing home price reached $189,000 in December, according to the National Association of Realtors.

To keep metropolitan Phoenix's existing home affordability index below 100 during the first part of this year, interest rates can't climb above 6.12 percent and prices must flatten out.

Housing affordability varies by Valley city because of different median home prices and incomes. Gilbert has high home prices but the town's median household income is also higher. For example, the resale index in Gilbert is 146 because the area's $205,000 median used home price is offset by an almost $75,000 household income.

Avondale has a resale index of 132 due to a median used home price of $163,000 and a household income of $53,640.

Scottsdale is the least affordable market for both new and used homes. Its resale index is 65 because of a $385,000 median used home price and a household income of only $62,700. Its median new home costs $569,095, which gives it a rating of 44.