The NAR's affordability index reached a record-high reading of 206.1 in January. The index is calculated by with a formula that takes into account prices, household income and mortgage rates, which have been hovering at or near record lows for the better part of five months. The NAR notes that a reading of 100 in the index represents the point where the average household income is substantial enough to qualify for a home priced at the national median for an existing home, assuming the lender will require a 20 percent down payment and 25 percent of gross income available for mortgage payments.
Based on the NAR's affordability formula, the average household has a little more than twice the necessary income to qualify for the average-priced home in January, not that affordability is likely to spur a miraculous rebound in the housing sector anytime soon, according to most economists. There are still millions of homeowners underwater on their mortgages, meaning they owe more on their home loans than their homes are worth.
This situation often leads to foreclosure, as many underwater homeowners choose to walk away from their homes rather than continuing to sink money into a losing investment, known as a strategic default. The problem is somewhat of a vicious circle, as well, as more foreclosures translate to further price declines and thus more underwater homeowners. Given those parameters, most economists project the housing market will continue to struggle at least into next year.
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