The Alabama Housing Affordability Index (HAI) finished the year on a very positive note. The statewide HAI rose to 164.1 in the fourth quarter of 1999, up over 12 percentage points from the third quarter. Interestingly, the third quarter was the only quarter in 1999 for which housing affordability in Alabama actually declined. Because of the significant increase in housing affordability during the fourth quarter, the Alabama HAI finished the year at 161.5, up 3.67 percent from 1998, which is the highest the index has been since 1993.

The increase in fourth quarter housing afford- ability occurred despite an increase in mortgage interest rates of 14 basis points, which raised the blended effective rate to 7.66 percent during the last quarter of the year. For all of 1999 the mortgage interest rate only increased by 30 basis points or a little over a quarter of 1 percent. This is a remarkably small increase in interest rates when you consider the fact that the Federal Reserve raised short-term interest rates three times last year with successive quarter-point interest rate adjustments.

The stability in the blended mortgage interest rate reflects a number of factors. First and foremost, the inflation rate has been remarkably tame throughout what has now become the longest economic expansion on record. As a result, the inflation premium built into long-term mortgage rates has also been small. Another consideration has been the very substantial increase in the size of the secondary mortgage market. The growth in the use of mortgage backed securities continues to provide substantial liquidity to the primary mortgage market, insuring an adequate and affordable supply of mortgage funds for homebuyers. Last, the increased availability and growing consumer acceptance of adjustable rate mortgages has allowed consumers to take advantage of mortgage interest rates that in some cases are much lower than 30 year fixed rate mortgage loans.

A similar, but smaller gain in housing afford- ability was also recorded for the United States during the last three months of 1999. Nation- wide, the housing affordability index rose from 127.1 in the third quarter to almost 130 in the fourth quarter.

The Statewide Housing Affordability Index is calculated as the ratio of the state’s actual median family income and the family income required to purchase the median priced home in the state. An index number of 100 indicates that a family earning the median income has just enough buying power to qualify for a mortgage on the median priced, existing single family house, given standard underwriting criteria. The higher the index number, the better, indicating that housing is more affordable.

With the publication of the fourth quarter housing affordability we have added a new metro area to our index number calculations. During the last quarter Lee County has been reclassified as the Auburn/Opelika Metropolitan Area by the U.S. Census Bureau. Since Lee County had been included in the HAI, this reclassification does not cause any substantive change in the calculation or comparability of the index. The state now has a total of 11 instate Metro Areas.

Within Alabama, housing affordability increased in every metro area except Birmingham. All of the state’s metro areas’ median home prices fell during the fourth quarter, more than offsetting the effects of rising mortgage interest rates in all the MAs but Birmingham. In some metro areas home prices fell dramatically during the last three months. Anniston, Florence, and Gadsden all reported double digit declines in median home prices. In the Decatur and Tuscaloosa Metro Areas, median home prices fell by 9.95 percent and 8.64 percent, respectively. For market savvy homebuyers, there appear to be some very attractive home prices out there.

At the county level, only Baldwin County reported an increase in median home prices. This reflects the very robust market for vacation and second homes in this region of the state. For the year ending in December, median home prices were up almost 10 percent in Baldwin County. Even here, however, there are some indications that the real estate market is beginning to slow. Median home prices rose by less than a quarter of one percent during the last three months of 1999.

Part of the fall in home prices reflects the normal, seasonal slowdown in the housing market that generally occurs during the winter. However, it does appear that the Federal Reserve’s attempt at slowing the economy is beginning to have an effect. December sales of existing homes in Alabama declined from earlier months and selling time had begun to lengthen toward the end of the year. Housing is generally the first sector to suffer when interest rates increase. With the Fed’s most recent interest rate increase, the fourth in the last six months, and expectations of more rate hikes to come in the future, we look to additional slowing for the housing market in 2000.