What it will take to make homes affordable again for millions of Americans (2024)

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As mortgage rates reached a 23-year high last week, the cry went off across markets and social media: Is housing affordability dead? Has a version of the American dream — home ownership, kids, backyard barbecues — died with it?

The question is sharp because housing affordability has dropped by nearly half since the ultra-low interest rate days of 2021, according to the National Association of Realtors.

The median family was already $9,000 short in August of the income needed to buy the median existing home, the association says, and the recent surge in rates since has moved another five million U.S. families below the qualification standard for a $400,000 loan, according to John Burns Real Estate Consulting. At 3% mortgage rates, 50 million households could get a loan that size. Now it's 22 million.

While an easing in treasury bond yields this week has brought the 30-year fixed mortgage back a shade below 8%, there is no quick fix.

The qualifying yearly income for a median-priced house in 2020 was $49,680. Now it's more than $107,000, according to the NAR. Redfin puts the figure at $114,627.

"[These are] stunning numbers that render house affordability even more challenging for too many American families, especially those looking to buy their first home," bond-market maven Mohamed El-Erian, an advisor to Allianz among many other roles, posted on X.

"It's a very worrisome development for America," NAR chief economist Lawrence Yun said.

Affordability depends on three big numbers, according to Yun — family income, the price of the house, and the mortgage rate. With incomes rising since 2019, the bigger issue is interest rates. When they were low, they papered over a surge in housing prices that began in late 2020, helped by people relocating to areas like Florida, Austin, Texas, and Boise, Idaho, to work in their old cities from their new homes. Now, the surge in rates is crushing affordability even as incomes rise sharply and housing prices mostly hang on to the big gains they generated during Covid.

"At the current 8% mortgage rate, mortgage payment[s] are 38% of median income," Moody's Analytics chief economist Mark Zandi said. "The mortgage rate has to fall to 5.5%, or the median priced home has to fall by 22%, or the median income has to increase by 28%, or some combination of all three variables."

At the same time, demand for adjustable-rate mortgages has spiked to its highest level in a year amid the broader slowdown in mortgage applications.

What needs to change to make housing affordable again

All three indicators face a tough road back to "normal," and normal is a long way from here. A few numbers illustrate why.

The National Association of Realtors measures affordability through its 34-year old Housing Affordability Index, or HAI. It calculates how much income the median family has to have to afford the median existing home, which, right now, costs about $413,000, according to NAR. If the indexequals 100, it means the median family has enough income to buy that house with a 20% down payment. The index assumes the family wants to pay 25% of its income toward principal and interest.

The long-term average of the HAI is 138.1, meaning that, normally, the median family has a 38% cushion. Its all-time high was 213 in 2013, after the housing bust and 2008 financial crisis.

Right now, that index stands at 88.7.

A few scenarios using NAR data help illustrate how far affordability is from the average between 1989 and 2019, and what would be required to push it back into a more typical range as the national average for the 30-year ticked lower to 7.98% on Tuesday.

  • If home prices are stable, rates need to fall to 3.55% in order to be back to historical average.
  • If prices grow 5%, rates need to fall to 3.16%.
  • If prices stay the same but incomes increase 5%, rates need to fall to 3.95%
  • A mortgage rate that stays around 8% means median home prices need to fall by 35%, to $265,000.
  • If rates stay at 8% and prices at current levels, income needs to increase by 63%.

But these numbers understate the challenge of getting affordability back to where Americans are used to seeing it.

Getting back to the affordability people enjoyed during the hyper-low interest rates of the pandemic would take even more: The HAI reached a yearly average of 169.9 that year, a level few think will come back any time soon.

Affordability became stretched partly because home prices rose 38% since 2020, according to the NAR, but more important was the jump in average interest rates from 3% in 2021 to as high as 8% last week. That's a 167% jump, driving a $1,199 increase in monthly payments on a newly bought house, per NAR.

Higher wages are a plus, but not enough

Rising incomes will help, and median family incomes have climbed 16% to more than $98,000 since 2020. But that isn't nearly enough to cover the affordability gap without devoting a higher share of the household paychecks to the mortgage, said Zandi.

Aside from the raw numbers, the direction of monetary policy will keep incomes from fixing the housing problem, said Doug Duncan, chief economist at Fannie Mae. The Federal Reserve has been raising interest rates precisely because it thinks wages have been growing fast enough to reinforce post-Covid inflation, Duncan said. Year-over-year wage gains slipped to 3.4% in the most recent job-market data, he said, and the Fed would like wage growth to be lower.

Downward pressure on home prices would help, but it does not look like they will decline by much.And even if home prices do the decline, that trend won't be sustainable unless America builds millions of more homes.

After prices surged from 2019 through early 2022, it was easy to assume a big price correction coming, but it hasn't happened. In most markets, prices have even begun to turn up a little bit. According to the realtors' association, the median price of an existing home dropped by more than $35,000 in late 2022 but has risen by $45,000 since its low in January.

Not enough new housing in America

The biggest reason is that so few homes are up for sale that the laws of supply and demand aren't working normally. Even with demand hit by affordability woes, buyers who are out there have to compete for so few homes that prices have stayed close to balanced.

"Boomers are doing what they said they were going to do. They are aging in place," Duncan said. "And Gen X is locked into 3% mortgages already. So it's up to the builders."

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The builders are kind of a problem, said Redfin chief economist Daryl Fairweather. They've been boosting profits this year, and BlackRock's exchange traded fund tracking the industry is up 41%, but Fairweather said they've barely begun to address a long-term housing shortage Freddie Mac estimated at 3.8 million homes before the pandemic, a number that has likely grown since.

Builders have begun work on only 692,000 new single-family homes this year, and 1.1 million including condominiums and apartments, she said. So it will take nearly four years to build enough houses to rebuild supply, and that leaves out new household formation, she added. Meanwhile, apartment construction has already begun to slow, and some builders, though not all, are pulling back on mortgage buydowns and other tactics they have used to prop up demand. PulteGroup's CEO told CNBC this week it has been buying down mortgages to an effective rate of 5.75%.

New homes sales for September announced on Wednesday came in much higher than expected, up 12.3%, though that covers contracts signed in September when mortgages rates were lower than now.

There are reasons to believe more buyers could materialize. Duncan said the millennial generation is just moving into peak home buying years now, promising to add millions of potential buyers to the market, with the biggest annual birth cohorts reaching the average first-time purchase age of 36 years around 2026. If rates do begin to decline, Fairweather predicts that will bring more buyers back into the market, but inevitably push prices back up toward previous peaks, which there had been signs of earlier this year when mortgage rates dipped to 6% in early March.

"We need a couple of years more building at this pace, and we can't sustain the demand because of high interest rates,'' Fairweather said.

The Fed and the bond market are big problems

There are two problems with mortgage rates right now, economists say. One is a Fed that is determined to not declare victory over inflation prematurely, and the other is a hypersensitive bond market that sees inflation everywhere it looks, even as the rate of price increases throughout the economy has dropped markedly.

Mortgage rates are 2 percentage points higher than in early March – even though trailing 12-month inflation, which higher interest rates theoretically hedge against,has dropped to as low as 3.1% from 6% in February. That's still above the Fed's 2% target for core inflation, but a measure of inflation excluding shelter costs — which the government says are up 7% in the last year despite declines or much smaller gains in housing prices reported by private sources — has been 2.1% or lower since May.

The Fed has only raised the federal funds rate by three-fourths of a point since then, as part of its "higher for longer" strategy — maintaining higher interest rates rather than aggressively adding more rate hikes from here. The biggest reason mortgages have surged of late is the bond market, which pushed 10-year Treasury yields up by as much as 47%, for a full 1.6 percentage points. On top of that, the traditional spread between 10-year treasuries and mortgages has widened to more than 3 percentage points — 1.5 to 2 points is the traditional range.

"It's hard to justify the runup in rates, so it might just be volatility," Fairweather said.

Even so, few economists or traders expect the Fed to push rates lower to help housing. The CME FedWatch tool, which is based on futures prices, predicts even if the central bank is done, or at least near done with its rate hikes, it won't begin to cut rates until next March or May, and only modestly then. And spreads will likely remain extra-wide until short-term interest rates drop below the rates on longer-term treasuries, Duncan said.

It could take until 2026 to see a 'normal' real estate market

To get affordability back to a comfortable range will take a combination of higher wages, lower interest rates and stable prices, economists say, and that combination may take until 2026 or later to coalesce.

"The market is in a deep, deep freeze," Zandi said. "The only way to thaw it out is a combination of lower prices, higher incomes and lower rates."

In some parts of the country, it will be even harder, according to NAR. Affordability is even more broken in markets like New York and California than it is nationally, and moderate-income markets like Phoenix and Tampa are as unaffordable now as parts of California were earlier this year.

Until conditions normalize, the market will be the domain of small groups of people. Cash buyers will have an even bigger edge than normally. And, Yun says, if a buyer is willing to move to the Midwest, the best deals in the country can be found in places like Louisville, Indianapolis and Chicago, where relatively small rate cuts would push affordability near long-term national norms. Meanwhile, it's going to be a slog across the nation.

"Mortgage rates will not go back to 3% – we'll be lucky if we get back to 5," Yun said.

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What it will take to make homes affordable again for millions of Americans (2024)

FAQs

What it will take to make homes affordable again for millions of Americans? ›

To be specific: To make houses as affordable as they were on typical incomes back in February 2020, home prices would have to fall 40%, the average mortgage rate would have to plummet to an unheard-of 2.45% from its December 2023 average of 6.80%, or median household income would have to skyrocket to $129,096 from its ...

Will Gen Z be able to afford houses? ›

Gen Z seems to have a bit of savvy when it comes to the housing market. For example, many Gen Z homebuyers managed to take advantage of lower interest rates in 2020 and 2021. Since then, interest rates have increased to 7-8% depending on the loan. Interestingly enough, that rate hike isn't scaring Zoomers either.

Why is housing so unaffordable in the US? ›

"What we are building is at the high end, because of the increased cost of construction and because we have a lot of demand from higher-income renters," says Airgood-Obrycki. Most new apartments over the last decade have gone for $1,400 a month or higher, "and that's not affordable to the majority of renters."

How can I make my house more affordable in America? ›

When coupled with zoning reform, changes to government funding mechanisms can help enhance lower-income families' access to housing in higher-income areas. Reforms to government-financed affordable housing development programs can increase housing choice for low-income families.

How many homes will the average American own? ›

In fact, the average person will own at least three houses in their lifetime. Living in one place for most of your life may or may not be your goal, but if it is, there are things you must do as a homeowner to ensure your home lasts as long as you'd like it to.

How are millennials affording houses? ›

Millennials typically finance around 90% of a home's purchase price, according to NAR's 2023 Home Buyers and Sellers Generational Trends Report. Fortunately for Millennials, a 20% down payment is no longer necessary. Thanks to private mortgage insurance, down payments can be as low as 3% in some cases.

Will people be able to afford houses in the future? ›

It could take until 2026 to see a 'normal' real estate market. To get affordability back to a comfortable range will take a combination of higher wages, lower interest rates and stable prices, economists say, and that combination may take until 2026 or later to coalesce.

How are Americans affording to live? ›

As of June, 61% of adults are living paycheck to paycheck, according to a LendingClub report. In other words, they rely on those regular paychecks to meet essential living expenses, with little to no money left over.

What is the most unaffordable state in the United States? ›

According to several studies on cost of living, Hawaii is the most expensive U.S. state to live in. Prices are typically double in Hawaii compared to those on the mainland, and the continued rise in inflation is making costs ranging from housing to health care much more expensive.

Is America becoming unaffordable? ›

Under Democrats' failed economic policy, American households are paying $11,400 more on necessities annually. Even every day bills are becoming unaffordable, forcing more and more Americans to turn to second jobs to make ends meet and financing options as their savings are depleted.

What part of the US has the cheapest houses? ›

1. Iowa. Iowa came in at the top of our list of the most affordable homes in America. In the Hawkeye State, a home costs just $147,800, and it takes a mere 10.6 percent of the median household income to afford one.

Is there anywhere affordable to live in the US? ›

Albuquerque, NM. At $775 median monthly rent and a rent cost of 21.5 percent of one's income, Albuquerque remains one of the cheapest places to live in America after topping the list in 2023. One of the best things about New Mexico is the sunsets, and this city is no exception.

Where is the most affordable housing market in the US? ›

8 of the Cheapest Housing Markets in the U.S.
  • West Virginia. You'll find West Virginia at the top of almost every affordable housing market list in 2022. ...
  • Kentucky. ...
  • Alabama. ...
  • Ohio. ...
  • Indiana. ...
  • Michigan. ...
  • Pennsylvania. ...
  • Florida.

How many Americans own their homes free and clear? ›

The number of mortgage-free homes in the U.S. soared by 7.9 million from 2012 to 2022, reaching a total of 33.3 million, per the report.

Who owns most of the housing in the US? ›

The largest owner of apartments in the United States was Greystar, an international developer and manager headquartered in Charleston, SC. In 2024, Greystar owned nearly 109,000 units. MAA, a Tennessee-based real estate investment trust, ranked second, with 85,000 apartments owned.

How many Americans own their homes outright? ›

Almost 40% of US homeowners own their homes outright as of 2022—many of them baby boomers who refinanced when rates were low.

Is Gen Z struggling financially? ›

Gen Z's Financial Reality is an Everyday Struggle

According to research from ConsumerAffairs Research Team (2023): Workers in their twenties today have 86% less purchasing power than baby boomers did at the same age.

Why aren't Gen Z buying houses? ›

A new Redfin survey showed one in five millennials believe they'll never own a home. About one in 10 Gen Z-ers think the same. The study cites affordability as the top barrier and said according to those who do plan to buy, 40% are working side jobs to afford the down payment.

Is Gen Z financially stable? ›

Additionally, 53% of Gen Zers say higher costs are a barrier to their financial success, a separate survey from Bank of America found. And 73% of Gen Z respondents said today's economy makes them hesitant to set up long-term financial goals, according to a recent Prosperity Index study by Intuit.

What percentage of Gen Z still live at home? ›

Story at a glance

The rising cost of housing is keeping many Gen Zers from living on their own. A recent Credit Karma survey of 1,249 U.S. adults found that 31 percent of Gen Z live at home with a parent or other family member.

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