Decoding the Real Estate Affordability Index

If you follow real estate news, you've probably heard the term "affordability index" thrown around. But what does it actually mean — and why should buyers, sellers, and investors pay attention to it?

What Is the Real Estate Affordability Index?

The Real Estate Affordability Index, published by the National Association of Realtors (NAR), measures whether a typical family earns enough income to qualify for a mortgage on a median-priced home.

How it works:

• An index of 100 means a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home
• An index above 100 means the typical family earns more than needed — homes are more affordable
• An index below 100 means the typical family earns less than needed — homes are less affordable

The calculation assumes a 20% down payment and uses prevailing mortgage interest rates.

Why Affordability Has Declined

Affordability has been under significant pressure in recent years due to two converging forces:

1. Rising Home Prices

Home prices surged dramatically during 2020–2022, driven by historically low inventory, pandemic-era demand shifts, and remote work flexibility. Even as price growth has moderated, prices remain elevated compared to pre-pandemic levels.

2. Higher Mortgage Rates

The Federal Reserve's aggressive rate-hiking campaign pushed 30-year fixed mortgage rates from around 3% in early 2022 to over 7% by late 2023. This dramatically increased monthly payments for the same loan amount.

Example:

• $300,000 loan at 3%: ~$1,265/month
• $300,000 loan at 7.5%: ~$2,098/month

That's an increase of over $800 per month on the same loan — a massive impact on purchasing power.

What the Index Means for Buyers

When affordability is low, buyers face real challenges:

• Smaller loan amounts — Higher rates mean you qualify for less
• Larger down payments needed — To keep payments manageable, some buyers put more down
• Longer savings timelines — It takes longer to save for a down payment as prices rise
• Geographic trade-offs — Some buyers look to more affordable markets or suburbs

What the Index Means for Sellers

Low affordability doesn't mean homes stop selling — it means the pool of qualified buyers shrinks. Sellers in low-affordability environments should:

• Price competitively from day one
• Consider offering seller concessions (rate buydowns, closing cost assistance)
• Be prepared for longer days on market compared to peak years

What the Index Means for Investors

For real estate investors, affordability metrics can signal:

• Rental demand — When buying is unaffordable, more people rent, supporting rental income
• Entry points — Low affordability can create buying opportunities if you have cash or strong financing
• Market timing — Improving affordability (falling rates or prices) can signal a good time to buy before demand surges

Michigan Affordability Context

Michigan has historically been one of the more affordable states for homeownership. Markets like Detroit, Flint, and Lansing consistently rank among the most affordable major metros in the country. Even Ann Arbor, while pricier, offers better affordability than coastal markets.

However, the rate increases of 2022–2023 affected Michigan buyers just as they did buyers nationwide. The good news: Michigan's lower price points mean the affordability math still works better here than in many other states.

The Bottom Line

The affordability index is a useful tool for understanding the big picture of the housing market. But your personal affordability depends on your specific income, credit score, down payment, and the local market you're buying in.

Working with an experienced lender who can run the real numbers for your situation — and a Realtor who knows your target market — is the best way to understand what you can truly afford.