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The subprime mortgage and foreclosure meltdown of 2007-2008 emphasized the need for a re-conceptualization of measures of an individual household's ability to afford housing. A clear link needs to be established between what a household can afford and the loan amount for which a household qualifies. This paper provides a conceptual review of three commonly used housing affordability indices in the United States: (a) the Department of Housing and Urban Development (HUD) Affordability Index for homeowners and renters; (b) the National Low Income Housing Coalition Affordability Index for renters, also known as Housing Wage; and (c) the National Association of Realtors Affordability Index for homeowners. The review of measures showed a lack of ability to easily adapt housing affordability measures to individual households. Discussions on issues related to housing affordability measures are presented, including market affordability verses individual affordability, the residual income approach, and housing affordability and transportation costs. The authors recommend that housing practitioners utilize an adapted residual income approach that considers household size, geographic location, transportation, and non-housing related expenses, rather than standard affordability measures or qualifying guidelines. The authors also recommend that researchers and policy makers review qualifying ratios and make appropriate changes to better determine an individual household's ability to afford housing.
Key Words: housing affordability, housing affordability indices, housing policy
Introduction
Housing affordability is a prominent concern in the United States for multiple reasons. Since around 2007, there has been a decline in house prices, and in some parts of the country a significant depreciation has occurred. There has also been a continued emphasis placed on becoming a homeowner by the United States government with multiple programs being established to help low-income households obtain homeownership (Schwartz, 2006).
Qualifying guidelines for mortgages became more lenient for a time, contributing to the mortgage crisis. In addition, lenders approved borrowers regardless of the borrowers' ability to pay the loan, and many of those loans were loaded with predatory features (Rushton, 2007). At the same time, the nation as a whole experienced a negative savings rate (Bureau of Economic Analysis, 2008) and increased levels of debt-a notorious combination that caused concerns for housing instability.
Multiple types of housing affordability measures exist. Some approaches compare median housing prices and median household income to define...