Understanding the Affordability Index in the Twin Cities: What It Is and How It’s Calculated
Hi, I’m Travis Anderson, your local real estate expert in the Twin Cities. Today, I’m kicking off a four-part series diving deep into the affordability index—what it is, how we calculate it, and what it means for homebuyers in our area. Let’s get started by answering two key questions: What is the affordability index, and how do we figure it out?
What Is the Affordability Index?
Simply put, the affordability index measures our ability as a community to qualify for mortgages in a specific market. The higher the index number, the easier it is to afford a home. For example, if the index is 2.0, it means the median household income is exactly twice what’s needed to qualify for the median-priced home in the Twin Cities. A higher number signals greater affordability, while a lower number indicates tougher conditions for buyers.
How Do We Calculate the Affordability Index?
To calculate the affordability index, we look at three main factors: median home prices, interest rates, and median household income. Let’s break it down.
1. Median Home Prices
First, we examine home prices. Over the last 20 years, median home prices in the Twin Cities have seen significant changes. Back in 2005, the median price was around $225,000. The market hit a low in December 2011 following the Great Recession, but by January 2012, we started to see a recovery. Prices appreciated steadily, with a sharper increase during the COVID years. Today, the median home price is just below $400,000, while the average price is around $425,000. For the affordability index, we use the median to keep things consistent.
2. Interest Rates
Next, we factor in interest rates, which play a huge role in determining monthly mortgage payments. Twenty years ago, rates were around 6%. They peaked just below 7% before the Great Recession, then dropped significantly as the market worked to stimulate demand. By December 2011, rates hit a low, but they climbed again during the recovery in 2012. Rates hovered around 4% until 2020, when they dipped below 3%. Post-COVID, we’ve seen a sharp rise, and today, rates are hovering just below 7%.
When you combine median home prices with interest rates—assuming a standard down payment like 20% or 5%—you get the monthly payment, which represents the true cost of homeownership.
3. Median Household Income
The final piece of the puzzle is median household income. Twenty years ago, the median income in the Twin Cities was just over $80,000. It took a hit during the Great Recession but began recovering a year before home prices did. Despite some ups and downs, median income has grown steadily. As of now, it stands at $87,000.
Putting It All Together
By combining these three numbers—median home price, interest rate, and median income—we can calculate the affordability index. This tells us how easy (or hard) it is to qualify for the median home in the Twin Cities.
Twenty years ago, the index was around 1.5, meaning the median income was 1.5 times what was needed to afford the median home. For example, if the median income was $75,000, you only needed $50,000 to qualify for the median-priced house. During the Great Recession, the index peaked at 2.5 in December 2011, indicating that the median household could comfortably afford two homes with income to spare.
However, affordability has tightened since then. The index rose slightly during COVID but has been declining. Right now, it’s hovering around 1.0, which means the median income of $87,000 is just below what’s needed to qualify for the median home (about $91,000).
What’s Next?
This is just the beginning! In the coming posts, we’ll explore what the current affordability index means for the Twin Cities housing market and how it might predict future price trends. If you’d like to learn more or have questions, feel free to reach out via phone, text, or the comments below.
Thanks for joining me, and as always, all my best to you and yours!
Stay tuned for the next part of this series, where we’ll dig deeper into the affordability index and its implications for homebuyers in the Twin Cities....