How to Calculate Affordability

The affordability of the housing market can be understood as the ratio between the median family income and the qualifying income needed to own a median single-family home.The Housing Affordability Index (HAI), which reflects this ratio, is an economic statistic published each month by the National Association of Realtors (NAR). When successive months are plotted on a graph, the resulting chart can be used to understand the relative value of the housing market. The same information is also used by economists to evaluate the potential impact of the housing market on the larger economy.

Step 1

Find the median price. The NAR uses its own data on the median price of single-family homes, published monthly. The information comes from surveys on existing-home (as opposed to new-home) sales.

Step 2

Find the mortgage rate. The effective annual mortgage rate reflects the total cost to homebuyers, including interest, fees and other costs. The effective mortgage rate used in the HAI is reported monthly by the Federal Housing Finance Board.

Step 3

Calculate the monthly payment. When calculating the monthly payment on the median-price home at the effective mortgage rate, the NAR assumes a 20 percent down payment. This results in a formula based on M (median price) and ER (effective rate) as follows: M x 0.8 x (ER ÷ 12) ÷ (1 - (1 ÷ (1+ER ÷ 12)^360))

Step 4

Calculate the necessary monthly income. When calculating the necessary monthly income to qualify for a mortgage on the median-priced home, the NAR assumes the homeowner uses no more than 25 percent of his household gross monthly income for the mortgage payments. This means that the necessary monthly income is equal to the monthly payment (step 3) times 4. For the necessary annual income, multiply again by 12.

Step 5

Find the median family income. The NAR uses data on median family income from the Census Bureau Decennial Survey. Because this information is not always current, the NAR must rely on projections of median income and make revisions to the HAI as actual data is released.

Step 6

Calculate composite housing affordability. Housing affordability is the ratio of the annual median family income (step 5) to the annual necessary income (step 4). The HAI multiplies this ratio by 100, providing the formula with A (affordability), MFI (median family income), and Q (necessary qualifying income) as follows: A = (MFI ÷ Q) x 100.


A reading of 100 on the Housing Affordability Index indicates that the median family income is equal to the cost of owning the median-priced single-family home. Higher readings show a greater level of affordability.