The recent Existing Home Sales release published showed a  sixth consecutive month of single-family home prices higher than a year ago. What does this mean for affordability? The answer may surprise you.

The August Existing Home Sales release published in late September showed a strong rise in home prices from a year ago – 10.2 percent for the median priced existing single-family home sold. This news is reassuring for owners who can expect that wealth they have accumulated in their property will maintain or increase, but at first glance this seems to be troubling news for potential buyers who have not purchased a home yet. Have they missed the best time to buy?

The Housing Affordability Index offers some reassurance for these would-be buyers. As it turns out, the Housing Affordability Index suggests that the national median priced home was actually more affordable for the median-income family in August 2012 than it was in August 2011 even though home prices are up.

How is this possible? While prices are up compared to one year ago, mortgage rates are nearly a percentage point lower and incomes are up. In fact, the release of American Community Survey data on family incomes led to a slight upward revision of 2011 income and a subsequent slight increase in NAR’s projections for 2012. If you’re surprised to hear that, it may be because you heard about a decline in REAL family income as measured by the Census bureau. Nominal family income, the data used in this series that measures dollars actually earned in 2011, actually rose by 1.4 percent from 2010 to 2011.

Since the Housing Affordability Index factors in the effect of house prices AND income and mortgage rates, it is the case that nationally, the median priced home is more affordable to the median income family than it was a year ago. At 185.0, the Housing Affordability Index shows that the median income family earns 85 percent more than the income needed to qualify to purchase the typical home that was sold in August. Regionally, affordability is improved over one year ago in every area except the West, where the more than 15 percent year-over-year price gain offset more moderate income gains and the benefit of lower mortgage rates. Still, even in the West, the median income family earns at least 40 percent more than is needed to qualify to purchase the median priced existing home. Check out the data release here.

The Housing Affordability Index calculation assumes a 20 percent down payment and a 25 percent qualifying ratio (principle and interest payment to income). See further details on the methodology and assumptions behind the calculation here.