Is There a Housing Affordability Crisis in the United States?

Record-high home prices combined with rising mortgage rates have made it more expensive to purchase a home in the United States in June “than it has been for any month in more than three decades,” according to a Wall Street Journal report.  

WSJ used the National Association of Realtors’ housing-affordability index, an index that incorporates family incomes, mortgage rates and the sales price for existing single-family homes, plummeted to 98.5 in June, the association revealed on August 12. This was the lowest index level since June 1989, when the index was around 98.3.

Existing-home sales have plummeted for five consecutive months. In the aforementioned period, interest rates climbed upwards while home prices gradually rose. This two-prong rise in interest rates and home prices has led to the most significant drop in housing affordability in the US in decades. As a result, many people are being priced out of various markets and are compelled to rent or head to states in Middle America or the Sun Belt with more affordable housing markets.   The WSJ report observed that “Even with fewer transactions, prices continue to rise from a year ago because the number of homes for sale around the U.S. remains below historical levels.”

Though affordability conditions have slightly relaxed in the past few weeks. Mortgage rates reached a 13-year high in June but are slowly dropping. Several buyers who were initially priced out have begun re-entering the market in July and August, per accounts from real estate agents.   

“Thankfully, the worst in affordability could already be over for this cycle,” stated Lawrence Yun, NAR’s chief economist. “Mortgage rates have calmed down in recent weeks, and the consistent wage growth … is narrowing the gap with home-price growth.”

Existing home prices have surged 46% national over the past three years, per the NAR’s report. Though homes were still affordable, relatively speaking, in 2020 and 2021, due to mortgage rates hitting record lows, which offset the bulk of the price hikes for buyers. 

Mortgage rates increased since the start of 2022. They rose to 5.22% in the past week. For perspective, mortgage rates stood at 3.1% at the end of 2021, per figures from mortgage-finance company Freddie Mac. 

Nationally speaking, economists project that home-price growth will slow down substantially by 2023. Several others are predicting small year-to-year price declines. However, several economists believe that years of slowdowns in new home construction in the aftermath of the 2007-2009 recession has left behind an undersupplied housing market. 

“We’re not going to go back to 2019 prices,” declared Nicole Bachaud, an economist at Zillow Group Inc. “Even if prices start to fall a little bit, it’s not going to be in any meaningful way that impacts affordability.”

The WSJ report noted that mortgage-interest rates in 2022 are lower and home prices and incomes are higher, compared with the last time affordability was at a similar low. 

In June, the median price for a single-family home was $423,300. The NAR reported that the mortgage rate was at 5.6% and median family income was $91,952 in this same month. Back in June 1989, the median existing single-family home price stood at $94,800, mortgage rates hovered around 10.6% and the median family income was roughly $34,128. 

The US technically does not have a single housing market. It has multiple housing markets that vary in price, size, and quality. This allows people who are experiencing housing affordability problems in major cities in blue states to move to more affordable housing markets in red states. That said, urban America is facing a profound socio-economic crisis that its ruling class is incapable of handling.

If America wants to make housing affordable across the board, it needs a new ruling class that prioritizes reforms that relax certain forms of zoning and that allow for home-builders to bring more houses on the market. Ultimately, the current housing dilemma is a question of supply-side issues.

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