Homes may be cheaper, but they are not more affordable

The National Association of Realtors' Housing Affordability Index is about 53 points higher now, at 171.6, than it was in 2006, at 107.6.

But does that mean homes are more-affordable now for Americans than they were three years ago? The answer is, "that depends." Here's why:

Two factors are working in favor of prospective homeowners. First, the U.S. median home price, at $172,900 as of May, is about 22 percent lower today than the $221,900 average price level for 2006. That's a trend that's helping prospective buyers.
Second, the 4.95 percent average interest rate for a 30-year, fixed rate mortgage in May 2009 is lower than the 6.58 percent average for 2006 another factor that's helped buyers.

Big difference: Down payment requirements

The decline in both home prices and fixed interest rates suggests that homes are easier to buy now, from a monthly payment standpoint , and the NAR's index that indicates as much. But are homes more accessible today?

For many potential buyers, no, they're not, and the big reason is today's more rigorous lending standards. The 4.95 percent fixed rate applies to near-perfect credit score borrowers with a 20 percent down payment. Many potential home buyers will not come close to meeting those requirements: fall below either and you're likely to pay a considerably higher interest rate. The higher interest rate will quickly drop the home affordability index from its lofty 171.6.

And, as many potential home buyers know, banks and other mortgage lenders are routinely denying mortgages to home buyers with adequate incomes, if the down payment is too low, or if credit scores are below an optimum level, among other factors.

Housing Sector Analysis: So are homes more affordable today than in 2006? Technically, they are, but as a practical matter this metric is irrelevant for most potential buyers. For most, the 'affordability' index is sort of like saying there's a vault filled with $50 million for you at the center of the earth. All you have to do is tunnel there and pick it up.

In general, take any National Association of Realtor data with a grain of salt. (My recommendation: when you hear or see an NAR add, turn the radio off or hit the mute button.) The NAR ads sometimes contain useful information, but too often they're laced with subtle half-truths and public relations material such as, 'On average, a home appreciates over a 10-year period.' That statement gives you the impression that buying a home will always result in home value appreciation, but the key qualification there is "on average." That means you could buy in year one then sell in year six, end up taking a massive loss, before prices rebound by year 10.

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