Show all work and formulas 2.) Jenny and Paul Hardin are relocating to Austin, T
ID: 2595242 • Letter: S
Question
Show all work and formulas
2.) Jenny and Paul Hardin are relocating to Austin, TX in January 2017. Jenny's new job will offer her $23,000 a year, while Paul's new income will be $31,500. Both of their employment packages promised annual increases. Jenny will get 4.25% and Paul gets 5.75% increases every year. After some research, the Hardins decided that they should live in the Green Valley, a suburb of Austin so their son Evan can attend the best school in the area. According to the Federal National Mortgage Association (FNMA), the qualifying income for the median priced house in the Green Valley area would be $55,100 .
a) What would be the Housing Affordability Index (HAI) ?
b) What does this index mean for the Hardins? Can they buy a house in the Green Valley? And if not, how would they be able to?
Given that the inflation rate is expected to be 3.5% after 2017. Assume that only income, but not the median price of $55,100 would be affected by inflation.
Explanation / Answer
1. Housing Affordability Index is calculated by dividing the median family income by median qualifying income of the state.
Median Household Income = Gross Income / number of members = (23,000+31,500) / 2 = $27,250
Qualifying income for median priced house = $55,100
HAI = 27,250 / 55,100 = 0.4945 or 49.45%
2. Housing Affordability index shows the degree to which the middle income family can afford the mortgage payments on housing loan. In the given case, HAI is 49.45% which means that Hardins can afford only 50% of the cost of the house as mortgage. As a result, Hardins cannot buy house in Green Valley.
3. Calculation of HAI with inflation rate.
Effective salary of Jenny after 2017 = 23,000 (1+4.25%) / (1+3.5%) = $23,167
Effective salary of Paull after 2017 = 31,500 (1+5.75%) / (1+3.5%) = $32,185
Median Salary = 23167 + 32185 / 2 = $27,676
HAI = 27,676 / 55,100 = 0.5023