Identifying Weaknesses in Practitioners’ Housing Affordability Indices

Personal Finance, Military Families February 06, 2017 Print Friendly and PDF

 

Jewkes, M. D. & Delgadillo, L. M. (2010). Weaknesses of housing affordability indices used by practitioners. Journal of Financial Counseling and Planning Education, 21 (1), pp. 43-52.

Brief Description:  Three housing affordability indices are commonly used to assess one’s ability to qualify for mortgages and for housing programs. Strengths and weaknesses are presented. Weaknesses include use of gross income instead of take-home pay, and no consideration of household size or preferences. The affordability ratio, paying 30 percent of one’s income for housing, is used across the board, but it may not reveal the true housing cost burden that households may face after paying other necessities.

Implications:  Housing counselors and other practitioners may need to go beyond using the standard methods to establish true affordability. Authors suggest including all housing costs, not just the mortgage or rent payment ( using taxes, insurance, utilities, homeowner’s association fees, if relevant). Consider costs from changes in residence such as commuting to work, school, or shopping, and increased utilities if larger or less energy-efficient home. Also using net income would provide a more accurate picture of affordability. Another approach is to use a modified residual income strategy by working with income and expense statements to determine a realistic housing payment.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.