This is a rather strange indicator of how affordable the homes are in a given area−strange primarily because it makes assumptions that may or may not be true. Generally, the index notes the amount of income needed to purchase an area's median-priced home in a transaction with a 20% down payment and an institutional mortgage loan for the balance of the purchase price. In recent years, however, fewer and fewer transactions match this formula.



So be it. Once the index identifies the amount of income needed for such a purchase locally, it looks at the percentage of existing households that have enough income or more to complete such a purchase. In recent years, it has all too often been the case that 30% or fewer of our households could afford to buy our median-priced home.



As this percentage moves up and down over time, it provides some insight into the strength of the market. If a larger percentage of households can afford the median-priced home, housing is more affordable, and the number of sales should rise. Conversely, if the percentage declines, housing is less affordable and sales will likely decline.



The market cycle is constantly on the move, though, and wise buyers are alerted to wait for the often brief time span in which prices have either stopped rising or actually fallen. Generally, that is when the bargains show up. For help email Beth at beth@bethbillington.com.