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Why does Moody's Analytics U.S. housing affordability index differ from that of the National Association of Realtors (NAR)?

The National Association of Realtors (NAR) calculates a quarterly housing affordability index (HAI) for the nation using U.S. data for the median existing house price, the median family income, and mortgage interest rates.  This index shows whether a family earning the median income can afford to carry the interest and principal payments on a median-priced home. An index value of 100 would indicate that a typical household has just enough income to qualify for an 80% mortgage for a median-priced home.  A higher index would indicate greater affordability of housing.

Moody's Analytics constructs similar indices for Census regions and divisions, states and metro areas. The NAR measure of affordability for the U.S. trends closely with the Moody's Analytics measure, but is lower. In 2004, the NAR measure was about 11% below Moody's Analytics' index.

The primary reason for the discrepancy in the level of the U.S. index is that we use a weighted average of the state affordability indexes (with home sales as the weight).  Second, we use annual state-level effective interest rates, whereas the NAR uses the monthly U.S.-level effective interest rate. Both sets of rates are obtained from the Federal Housing Finance Board. 

Aside from these two points, we use the same methodology and assumptions as the NAR.  We assume a 20% down payment, a 30-year loan term, a 25% coverage rate and the median family income.  The 25% coverage rate is used instead of the more typically quoted 30% to account for additional costs incurred by taxes, maintenance and insurance.

Moody's Analytics' U.S. affordability index reflects regional variability more accurately than the NAR index, since the state indexes are calculated using each state's income, price and mortgage interest rate.   Additionally, as the weighted average of the state indexes, our U.S. index is better suited for making comparisons across regions as it falls at the middle of the distribution of the state indexes.