The affordability index measures the household income needed to qualify for a traditional mortgage on a median-priced single family home. So it's looking at a mortgage with a 20 percent down payment and a monthly payment below 25 percent of income at the currently effective rate on conventional mortgages.

When the index is at 100, that means that a household earning the median income has exactly the amount it needs to qualify for a conventional mortgage on a median-priced home. When it is above 100, it signals that the median income is higher than needed to qualify for a mortgage. An AI score of 130, for example, would indicate that households earning the median income would have 30 percent more income than needed to qualify.

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Rising interest rates and rising home prices put downward pressure on the affordability index, meaning homes are becoming less affordable. Rising incomes put upward pressure on the index, meaning homes are more affordable.

The index has been dropping rapidly since peaking in January at 210.7. We're now down to 157.8, according to the preliminary numbers released for July on Monday. Home prices have been rising and interest rates climbing, while wages haven't kept up. That's how we got to the lowest level of affordability seen since July of 2009.

According to the NAR, this shouldn't be dire news. A score of 157.8 officially indicates that a household earning the median income has 57.8 percent more income than needed to get a mortgage on a median priced home.

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Unfortunately, it's not clear that the index is very useful on its face. The index has never, in fact, dipped below 100 since the late 1990s. Even during the height of the last housing bubble, the indexes lowest score was 101—the affordability nadir hit in July 2006. This is what has led folks like Barry Ritholtz to declare the index "useless."

A recent paper by three economists from Robert Morris University in Pennsylvania, however, suggests that the index can be used to detect housing bubbles. Adora Holstein, Brian O'Roark, and Min Lu track the index against its long-term trend line. When the index falls below trend, it marks a possible start of a housing bubble. They suggest that when the monthly affordability index value falls below trend for at least three months, a housing bubble probably exists.

Using the monthly composite home affordability index from FRED, the database maintained by the St. Louis Federal Reserve bank, we can chart out every single monthly index report and construct a long-term trend line.