Arizona Real Estate Center Releases Affordability Study

February 01, 2005

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.<separator></separator>Even though the average interest rate on a 30-year mortgage neared 6 percent during the summer months of 2004, the annual average interest rate remained unchanged from the 2003 average of 5.5 percent.<separator></separator>"While interest rates were expected to increase during 2004, they remained fairly stable due to low inflation," said Jay Butler, director of the Arizona Real Estate Center located at Arizona State University’s Polytechnic campus.<separator></separator>In the resale home market, the median home price increased 12.8 percent from $155,000 in 2003 to $174,815 in 2004. During 2004, the median home price increased from $156,000 in January to $190,000 in December, a 22 percent increase.<separator></separator>For new homes, the median home price increased 12.6 percent from $173,240 in 2003 to $195,000 in 2004. During 2004, the median home price increased from $178,110 in January to $211,640 in December, a 19 percent increase.<separator></separator>"Although low mortgage interest rates have been very important in sustaining the market, rapid increase in the median home price has greatly increased the monthly payment," said Butler.<separator></separator>Based on 85 percent loan-to-value, the mortgage payment would have increased from $735 in January (5.3 percent for $156,000) to $920 in December (5.5 percent for $190,000). Based on the annual median price of $174,815, the resale affordability index will remain at 100 even if interest rate becomes 6.875 percent. If the median home price remains at $190,000 as found in December, affordability can only be maintained at 6.125 percent.<separator></separator>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 126 in 2003 to 114 for 2004. This is the lowest resale home index since 1990 when it was set at 106, with an interest rate of 10.5 percent and a median home price of $79,000.<separator></separator>For the same reasons, the Greater Phoenix new home affordability index value also declined from 113 in 2003 to 102. 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.<separator></separator>As home prices and incomes vary throughout the Valley, so does the affordability index.<separator></separator><ul><li>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 $186,000, is 138, while the new home median price of $249,630 set the new affordability index at 103. In Gilbert the resale index is 146 (median price at $205,000) and new home affordability index at 139 ($214,995). </li><li>The West Valley communities are known for their affordable housing: </li><li>With a resale median price of $163,000, Avondale had a resale index value of 132, while it was 144 in 2003 ($148,000). In the new home market the 2004 index value was 132 ($163,670), while it stood at 155 ($137,530) in 2003. </li><li>Based on a median resale home value of $134,900, the index value was 110, while it stood at 106 ($139,950) for the new home sector. </li><li>With median resale home price moving from $163,500 to $183,000 in Goodyear, the resale affordability index declined from 152 to 138. With new homes going from $169,370 to $186,310, the new home index moved from 147 to 135.</li><li>In Surprise, the resale index moved from 136 ($140,000) to 117 ($164,900). In new home market, the index declined from122 ($156,180) to 108 ($178,760). </li><li>Based on resale home value of $158,900, the resale index in Glendale fell from 137 ($142,000) to 124 ($158,900). In the new home market, the index declined from121 ($161,075) to 98 ($202,715).</li><li>The resale index for Mesa is 119 ($158,000) and new home index is 86 ($217,325). Much like the Greater Phoenix area, affordability can vary throughout a city. For example the resale index is 135 ($164,000) in East Mesa and 115 ($156,500) in North Mesa.</li><li>In North Scottsdale, the resale index value is 88 ($365,000) and the new home value is 56 ($526,000). In South Scottsdale, the resale index value is 104 based on median home value of $189,900.</li><li>In the city of Phoenix, the resale affordability index is at 129 ($139,500), but ranges from 120 ($168,000) in the Sunnyslope area to 86 ($225,250) in Christown area. In the new home market, the index value is 109. </li></ul>