What does this indicator measure?
This indicator attempts to quantify the affordability of homeownership in the Dallas area as well as in select communities. The indicator uses an index score called the Texas Housing Affordability Index (THAI), which is calculated by the Texas Real Estate Center at Texas A&M University. Researchers first calculate the income required to qualify for a conventional 80/20, 30-year home loan to purchase a home at the median price for the area, based on the prevailing area interest rate. The index score is computed by dividing median family income for the area by the required income to purchase a median-priced home. Thus, an index score of 1 means that households of median income have exactly enough income to qualify for a home loan for a median-priced home. An index score of less than 1 means that households of median income will struggle to buy a home and are unable to qualify to buy a median-priced home. An index score of more than 1 means that homes are relatively affordable in the area, and households of median income should be able to qualify to buy a median-priced home with ease and have more income left over for other purchases. Such a score can also mean that the household could qualify to buy a more expensive home. Note: The THAI index measures affordability with respect to income, but not with respect to savings. The index assumes that the family has the cash, presumably in the form of home equity, to meet a 20% down payment.
Also presented in this indicator is the similar First-Time Homebuyer Affordability Index (FTHAI), which follows the same theory but uses slightly different methodology to approximate housing affordability for first-time homebuyers. Instead of using the median home price and median family income, the FTHAI index uses the 25th percentile home price and the 25th percentile family income to represent a young family buying their first home. Moreover, instead of using interest rates for an 80/20 mortgage, the FTHAI assumes that first time homebuyers have less savings for a down payment and will need a 90% loan-to-value mortgage, which comes at a higher interest rate. For more information on methodology of the THAI and FTHAI, click here.
It should be noted that these data are based on information reported by the real estate industry. The geographies used by the real estate industry are based on local markets and do not necessarily match the political boundaries with which we are more familiar. As such, the “Dallas MLS area” in this indicator includes Dallas, Denton, Collin, Ellis, Hunt, Henderson, Rockwall, Kaufman, Van Zandt, Hopkins, Lamar, Delta, Navarro, and Wood Counties, and parts of Grayson and Fannin Counties.
Why is this indicator important?
Homeownership is a vital part of the American dream, one which many families will achieve. This indicator tries to quantify the affordability of homeownership in the Dallas area and select area communities, as compared with Texas and the nation as a whole. By comparing the costs of owning a home to incomes, this indicator develops an understanding of how attractive our housing market is, compared with other areas. Whether they are established families that have bought and sold several homes or young couples looking to buy their first home, the majority of families expect to be able to purchase a home.
This indicator quantifies how affordable it is for those families to buy a home in the Dallas area. This indicator is not directly concerned with the decision to buy versus rent a home, but rather on the affordability of homeownership for middle-class families. For more information on low-income households and comparisons of renters versus homeowners, please see the Homeownership indicator and the Affordable Housing aspiration.
How are we doing?
The Texas Housing Affordability Index (THAI) shows that, overall, purchasing a home in the Dallas area is more affordable than in Texas as a whole or in the nation as a whole. In Collin County, Denton County, and the overall Dallas MLS area the THAI index spiked in 2004, meaning that homes were suddenly more affordable for families of median income. One possible reason for the increase is very low interest rates in 2004, coupled with a large supply of new homes available for purchase as construction rebounded following the recession. As interest rates have risen in 2005 and 2006, we see the THAI falling again. However, homes are still more affordable in the Dallas area than they are in Texas or the nation as a whole.
Texas Housing Affordability Index |
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | Q4 2006 |
Dallas MLS Area | 1.74 | 1.82 | 1.87 | 1.94 | 2.60 | 1.83 | 1.73 |
Collin County | 1.87 | 1.99 | 2.05 | 2.53 | 2.93 | 2.36 | 2.11 |
Denton County | 1.75 | 1.87 | 1.96 | 2.17 | 2.74 | 2.05 | 1.87 |
City of Garland | 2.46 | 2.54 | 2.48 | 2.61 | | 2.55 | 2.45 |
City of Irving | 2.30 | 2.27 | 2.42 | 2.44 | 2.44 | 2.33 | 2.12 |
Texas | 1.58 | 1.69 | 1.68 | 1.81 | 1.46 | 1.68 | 1.55 |
USA | 1.38 | 1.45 | 1.43 | 1.61 | 1.53 | 1.23 | 1.11 |
Source: Real Estate Center at Texas A&M University,
http://recenter.tamu.eduCollin County, Garland, and Irving housing markets each had affordability indexes above 2.0 in 2005, meaning that families of median income had more than twice the income necessary to qualify for a loan to purchase a median-priced home. However, the THAI index may overestimate median family income somewhat for the cities of Garland and Irving, contributing to an overestimation of the affordability of housing in these communities. The index uses the median family income calculated for the entire Dallas Primary Metropolitan Statistical Area (PMSA) by the U.S. Department of Housing and Urban Development (HUD) as the value for Garland and Irving, despite the fact that the Dallas PMSA also includes high-earning Collin and Denton Counties. (For the purposes of the THAI, Collin County and Denton County median incomes are calculated separately.)
In the fourth quarter of 2006, the median home price in the area ranged between $110,200 in the city of Garland and $194,300 in Collin County. The overall Dallas MLS area market had a lower affordability index score than any of the individual communities at 1.83; however, this still represents affordable housing opportunities for families of median income wishing to purchase a median-priced home ($157,700). However, because the median income used is that of the entire MSA, there is a large proportion of families, particularly in the City of Dallas, making significantly less than the median family income, for whom housing is not so affordable. See the Demand for affordable housing indicator. Moreover, despite relatively high housing affordability for homeowners, many households in the area choose to buy the highest priced home for which they can qualify, rather than buying a more modest home with more manageable income requirements. For more information on the percentage of income spent on housing by area households, see the Housing cost burden indicator.
Texas First Time Housing Affordability Index |
| Q4 2005 | Q4 2006 |
Dallas MLS Area | 1.14 | 1.17 |
Collin County | 0.88 | 1.29 |
Denton County | 1.02 | 1.14 |
City of Garland | 1.41 | 1.46 |
City of Irving | 1.27 | 1.27 |
Texas | 1.07 | 1.05 |
USA | 0.64 | 0.62 |
Source: Real Estate Center at Texas A&M University, http://recenter.tamu.edu
Among first-time homebuyers, the Dallas area and local communities are less affordable than for established homebuyers, but still noticeably more affordable than the nation as a whole.
- The United States had an FTHAI index score of 0.62 in 4th quarter 2006, meaning that a would-be first-time homebuyer family with enough savings for a 10% down payment would need an additional 58% above their current income to qualify for a loan for a small home priced in the 25th percentile.
- The FTHAI index score for the overall Dallas MLS area market was 1.17, meaning that first-time homebuyers in the general Dallas area earning at the 25th percentile of income distribution have 17% more income than is necessary to afford a small home priced in the 25th percentile.
- Among area communities, only Collin County had an FTHAI index score indicating that homes were unaffordable for first-time homebuyers, at 0.88.