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Arizona Real Estate Center Releases 2005 Affordability Study

February 03, 2006

MESA, AZ — Since 1985, the Arizona Real Estate Center has computed affordability indexes for the Greater Phoenix area and several cities. An index value of 100 means that the typical home buyer, based on the current median resale price and household income, would be able to afford a median-priced home at the stated effective interest rate (5.7 percent). A lower index value indicates less affordable single-family homes, but does not take into account alternative housing forms such as townhouse/condominiums or manufactured housing. Further, the affordability index is based on monthly gross household income ($4,190) and does not take into account any wealth effects such as savings or equity appreciation in previous homes.

While interest rates were expected to increase during 2005, they remained fairly stable due to a strong bond market and low inflation. Even though the average interest rate on a 30-year mortgage neared 6 percent during the latter months of 2005, the annual average interest rate remained unchanged since 2003 at 5.5 percent.

In the resale home market, the median home price for 2005 was $250,500, a 37.5 percent increase from $174,815 in 2004. For the year, the median home price increased from $194,000 in January to $260,000 for December, a 34 percent increase. For new homes, the median home price increased 29.1 percent from $195,000 in 2004 to $251,795. For the year, the median home price increased from $213,585 in January to $286,825 for December or a 34.3 percent increase.

“Although low mortgage interest rates have been very important in sustaining the market, the rapid increase in the median home price has greatly increased the monthly payment,” said Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University’s Polytechnic campus.

Based on an 85 percent loan-to-value, the mortgage payment for a resale home would have increased from $925 in January (5.4 percent for $194,000) to $1,310 in December (5.9 percent for $260,000).

Based on the annual median price of $240,500, the resale affordability index will be at 100, if the interest rate would be 4.25 percent. If the median home price remains at the $260,000 as found in December, affordability can only be maintained at 3.5 percent. If the income and effective interest rate remained the same as for 2005, a resale index value of 100 would be found with a median sales price of $203,250.

Continued low interest rates and a slightly higher median household income were not enough to offset the higher median resale home price. The Greater Phoenix resale affordability index decreased from 114 in 2004 to 84 for 2005. This is the lowest resale home index since 106 was set in 1990 when interest rates were at 10.5 percent and the median home price was $79,000. For the same reasons, the Greater Phoenix new home affordability index value also declined from 102 in 2004 to 80. In 1997, the new home index was at 101, based on an average interest rate of 7.5 percent and median home price of $105,000.

Since home prices and incomes vary throughout the Valley, so does the affordability index.

  • Even though Chandler and Gilbert have some of the most expensive homes in the Valley, their respectively high household incomes support a strong affordability index. Thus, the resale affordability index in Chandler, based on a median price of $272,650, is 96, while the new home median price of $303,330 set the new affordability index at 86. In 2004, the resale index was 138 ($186,000) and the new home index is 103 ($249,630). In Gilbert the resale index dropped from 146 ($205,000) to 104 ($292,000) and new home affordability index went from 139 ($214,995) to 111 ($272,800).
  • The resale index for Mesa is 87 ($220,000), with a new home index of 73 ($260,585). Much like the Greater Phoenix area, affordability can vary throughout a city. For example the resale index is 101 ($222,950) in East Mesa and 89 ($205,000) in North Mesa.
  • In North Scottsdale, the resale index value is 54 ($600,000) and the new home value is 46 ($718,070). In South Scottsdale, the resale index value is 72, based on a median home value of $280,000.
  • In the city of Phoenix, the resale affordability index is at 97 ($189,500), but ranges from 124 ($150,000) in the Northwest Phoenix area to 63 ($250,000) in the east Camelback area. In the new home market, the index value is 80 ($228,665).
  • The West Valley communities are known for their affordable housing:
    • With a resale median price of $239,900, Avondale had a resale index value of 91, while it was 132 in 2004 ($163,000). In the new home market the 2005 index value was 98 ($224,915), while it stood at 132 ($163,670) in 2004.
    • Based on a median resale home value in El Mirage of $199,000, the index value was 76, while it stood at 110 ($134,900) for 2004. The new home index went from 106 ($139,950) to 86 (176,435).
    • With median resale home price moving from $183,000 to $260,000 in Goodyear, the resale affordability index declined from 138 to 99. With new homes going from $186,310 to $263,525, the new home index moved from 135 to 99.
    • In Surprise, the resale index moved from 117 ($164,900) to 82 ($240,195). In the new home market, the index declined from 108 ($178,760) to 82 ($240,845).
    • The resale index in Glendale fell from 124 ($158,900) to 90 ($221,900). In the new home market, the index declined from 98 ($202,715) to 68 ($293,925).