What Is Affordability Index?
Affordability index = median-household-income ÷ income needed to qualify for a median-home-price home. Index of 100 = the typical household can afford the typical home. Index of 80 = they'd need 25% more income. Index of 120 = they have 20% more than needed. In Denver, the index was 72 in 2024—median income couldn't afford median home. In Indianapolis, it was 115. Use it for market-research: affordable markets often have stronger rental-property demand as buyers are priced out.
The affordability index measures whether the typical household can afford the typical home—comparing median-household-income to the income needed to qualify for a median-home-price mortgage. Above 100 means the market is affordable; below 100 means it's not.
At a Glance
- What it is: Can median income afford median home?
- Why it matters: Market health; rental demand signal
- Index 100: Break-even
- Above 100: Affordable
- Below 100: Unaffordable
Affordability Index = Median Household Income ÷ Income Needed to Qualify
How It Works
The formula. Affordability index = median-household-income ÷ qualifying income. Qualifying income = the income needed to get a mortgage for the median-home-price at current rates, assuming typical housing-expense-ratio (e.g., 28%).
Example. Median-home-price $400,000. At 7% with 20% down, PITI ≈ $2,400. At 28% housing-expense-ratio, qualifying income = $2,400 ÷ 0.28 = $8,571/month = $102,857/year. Median-household-income $85,000. Index = $85,000 ÷ $102,857 = 0.83 = 83. Market is unaffordable—typical buyers need 20% more income.
NAHB version. The National Association of Home Builders publishes a Housing Opportunity Index (HOI)—similar concept. Above 50 = more than half of homes sold are affordable to median income. Below 50 = less than half.
For investors. Low affordability often means strong rental demand— buyers are priced out, they rent. High affordability can mean more competition from owner-occupants. Use it as one input in market-research, not the only one.
Real-World Example
Ava in Memphis. She compared Memphis and Austin for a rental-property. Memphis: median-home-price $245,000, median-household-income $52,000. Qualifying income for $245k at 7%: ~$58,000. Index: $52,000 ÷ $58,000 = 90. Slightly tight. Austin: median-home-price $550,000, median-household-income $78,000. Qualifying income: ~$130,000. Index: 60. Austin was far less affordable. She expected stronger rental demand in Austin (priced-out buyers) but higher price-to-rent-ratio made cash-flow harder. She chose Memphis—better cash-flow, decent index.
Pros & Cons
- Simple market health indicator
- Widely reported
- Comparable across markets
- Assumes median buyer; doesn't capture distribution
- Uses median-household-income—may not match renter demographics
- Rate-sensitive—moves with mortgage rates
Watch Out
- Rate sensitivity: Index drops when rates rise. A market at 100 can fall to 80 when rates go from 6% to 8%.
- Census lag: Median-household-income data can be 1–2 years old. Use latest census-data when available.
- One input: Combine with price-to-rent-ratio, job-market, and population-growth.
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The Takeaway
The affordability index measures whether the typical household can afford the typical home. Above 100 = affordable. Below 100 = unaffordable. Use it for market-research. Low affordability often means strong rental demand.