Methodology

The Maryland Association of Realtors® (MAR) Housing Affordability Index for First-Time Buyers, (MDHAI), methodology is based on that developed by the National Association of Realtors® (NAR). However, there are a few differences from the NAR First-time Homebuyer Affordability Index in that: 1) this index uses the U.S. Census Bureau's Maryland household income data, instead of median family income as used in the NAR index; 2) the index assumes that first-time buyers place a 5% down payment on the property (instead of 10%), and 3) due to the lower down payment, a 50 basis point (one-half of one percent) private mortgage insurance premium is required (instead of 25 basis points, as assumed in the NAR index). Below, the specific application of these assumptions are detailed:

1. Starter Home Price - We use the Maryland median home price as calculated by MAR based on data provided by MRIS, Inc. and the Coastal Association of Realtors®/ARIS® multiple listing service. The starter home price is computed by taking 85% of that figure. This is based on NAR surveys that show that first-time buyers typically purchase a home that is 15% lower in price, on average.
   
2. Monthly Mortgage Rate plus PMI - Similar to the NAR index, we use the national "Effective Mortgage Rate" on previously-occupied properties as provided in the monthly Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS). The effective interest rate modifies the average contract rate, incorporating the amortization of initial fees and charges. Then, in order to more accurately measure the total monthly payment costs to a typical first-time borrower, the effective mortgage rate is increased by adding 50 basis points to reflect the monthly cost of the private mortgage insurance (PMI) premium for a higher-risk buyer . [Note: For the full years 2000 - 2002, we use the MIRS effective interest rate series for Maryland for all conventional single-family mortgages (new and previously-occupied), as an annual state figure is not produced for previously-occupied properties alone.].
   
3. Monthly Principal and Interest Payment - The monthly P&I payment is calculated from the standard amortization formula for 360 months at the monthly effective mortgage rate plus PMI premium. As mentioned in the first paragraph above, it is assumed that the buyer makes a 5% down payment on the starter home price, mortgaging 95% of the price as the principal amount.
   
4. First-Time Buyer Median Household Income - The index requires calculations of median household income for 2002 and 2003, as the most recently available is the Census Bureau's 2001 figure for Maryland median household income. The Bureau of Commerce/Bureau of Economic Analysis series on actual Maryland state personal income (1970 to 2001) is used to construct a forecast of changes in Maryland personal income for 2002 and 2003. These percentage changes are then used to adjust the 2001 Maryland median household income figure for 2002 and 2003. NAR survey data shows that first-time buyers' incomes average about 57% of all buyers, so the forecasted median household income is adjusted downward by 43%. Finally, in order to apply the annual forecasts to the monthly data, the annual difference in median household incomes is pro-rated and incrementally added in the months displayed for 2002 and 2003.
   
5. Payment as % of Income - This percentage is based on the ratio of the annual P&I payment relative to the buyer's median household income.
   
6. Annual Qualifying Income - Once the monthly P&I payment is calculated, the annual qualifying income (a minimum) is computed by annualizing the payment and then multiplying by 4. The latter calculation applies the basic Fannie Mae qualifying rule that the P&I payment cannot exceed 25% of the borrower's annual income. This figure is the minimum income necessary to qualify for the typical home at current mortgage/insurance rates.
   
7. First-Time Buyer Housing Affordability Index - The index is the ratio of the Maryland first-time buyer median household income to the qualifying income necessary to buy a starter home at current mortgage interest and insurance rates. Thus, it measures the percentage of the necessary qualifying income that is achieved by a first-time buying household purchasing the median priced starter home.