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Methodology: REALTORS® Affordability Distribution Curve

About REALTORS® Affordability Distribution Curve and Score

The NATIONAL ASSOCIATION OF REALTORS® and REALTOR.COM partnered to create the Realtors® Affordability Distribution Curve and Score. The Realtors® Affordability Distribution Curve and Score measures housing affordability at different income levels for all active inventory on the market. For each state and the 100 largest metropolitan areas, Realtors® Affordability Distribution Curve shows how many houses are affordable to households ranked by income while Realtors® Affordability Distribution Score is the measure which is intended to represent affordability for all different income levels in a single measure.

What's New in the REALTORS® Affordability Distribution Curve and Score

The Housing Affordability Index (HAI) already gives some information about affordability.

The REALTORS® Affordability Distribution Curve and Score is different in two major ways:

  1. it considers affordability for all income levels, not just the median income, and
  2. it looks at affordability of active inventory or homes currently available for sale instead of homes that have already sold.

Methodology

Step 1

Calculate share of households from lowest to highest incomes

Example: In the United States, 62% of households have income less than $75,000

Step 2

Define a maximum affordable price and then calculate the percent of homes on the market with a price less than the maximum affordable price

Assumptions:

  1. 30% of income for financing, property tax, homeowner's insurance cost (down payment<20%, mortgage insurance premium is added)
  2. 30-year fixed-rate
  3. variable down payment

Example: In the United States, households whose income is less than $75,000 can afford to buy a home of $294,595. Looking at active listings, 62% of homes on the market are priced less than $294,595.

Step 3

Create REALTORS® affordability distribution curves

REALTORS® affordability distribution curve shows for the pth percentile of households ranked by income, what percentage (q) of total houses currently listed for sale they can afford.

Example: In the United States, 62% of households have income less than $75,000 and they can afford 60% of the existing inventory.

Step 4

Calculate REALTORS® affordability distribution score

REALTORS® affordability distribution score is equal to twice the area below the Realtors® affordability distribution curve

REALTORS® affordability distribution score lies between 0 and 2.

Score = 0, no household can afford any of homes on the market.

Score = 1, homes on the market are affordable to households in proportion to their income distribution.

Score = 2, all households can afford all homes on the market.

Example: After calculating the area under the Realtors® affordability distribution curve for the United States, the Realtors® affordability distribution score is 0.92 in January 2017. This means that households in many income levels can afford a smaller share of houses on the market than their income percentile.

Interpretation of REALTORS® affordability distribution curve and score

A REALTORS® affordability distribution score of 1.23 means that households can afford a greater share of houses on the market than their income percentile (more affordable area).

A REALTORS® affordability distribution score of 0.52 means that households can afford a smaller share of houses on the market than their income percentile (less affordable area).

Sources:

  • Nielsen: income distribution data
  • Realtor.com®: active inventory data, mortgage rates
  • Optimal Blue: percentage of down payment

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