Is The Housing Affordability Index A Misleading Indicator?
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Posted 13 December 2002 - 07:44 PM
Realtors, and many mainstream economists have often used the Housing Affordability Index (HAI) as a measure to assess whether homes are reasonably priced. This is an improper use of the HAI because it fails to take account of how inflation (or lack of inflation) will affect the affordability of a mortgage payment through time. In a higher inflation environment, a fixed monthly mortgage payment becomes much more affordable through time, since nominal income will typically increase roughly in step with the rate of inflation. However, when inflation is low, the burden posed by the mortgage payment will change little through time, because income will not be growing as rapidly. Economic and financial anal cysts who use the HAI as a measure of whether houses are properly priced are misleading the public.
The Housing Affordability Index:
A Case of Economic Malpractice
A short paper by Dean Baker
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