Soaring Construction Costs Drop Housing Affordability to Lowest Level in a Decade

According to the NAHB/Wells Fargo Housing Opportunity Index (HOI) released this week, just 54.2% of new and existing homes sold between the beginning of October and end of December were affordable to families earning the US median income of $79,900. 

This is down from the 56.6% of homes sold in Q3 2021 and is the lowest affordability level recorded since the beginning of the revised series in the first quarter of 2012.

Supply-chain bottlenecks that put upward pressure on home prices along with rising interest rates contributed to housing affordability falling to a 10-year low. 

Ongoing production challenges and the likelihood of higher interest rates in the months ahead threaten to drive housing affordability even lower in 2022.

Labor, Lumber, Supply Chain Key Factors

Supply-chain disruptions stemming from labor shortages to lumber to home appliances and other building materials are delaying construction times and contributing to higher home prices, NAHB Chairman Chuck Fowke said in prepared remarks. “Policymakers must focus on addressing these issues to help ease rising construction costs that are contributing to housing affordability headwinds,” he added.

The HOI shows that the national median home price increased to a record $360,000 in the fourth quarter, up $5,000 from the third quarter and a whopping $40,000 from the first quarter. Meanwhile, average mortgage rates increased by 21 basis points in the fourth quarter to 3.16% from 2.95% in the third quarter. Currently, mortgage rates are running above 3.5%, and this higher trend will further affect affordability later this year.

With the Federal Reserve signaling it will begin raising interest rates in March, mortgage rates are expected to further increase in the coming months, after beginning a steady rise in December, NAHB Chief Economist Robert Dietz noted. 

“To help ease growing affordability problems, policymakers must take steps to help builders to increase production to meet strong demand and stem the rapid climb in home prices that has taken place over the past year,” he said in prepared remarks. 

The Most and Least Affordable Markets

Lansing-East Lansing, Mich. was the nation’s most affordable major housing market, defined as a metro with a population of at least 500,000. There, 90.6% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $79,100.

It is followed by Scranton-Wilkes-Barre-Hazleton, Pa.; Pittsburgh; Indianapolis-Carmel-Anderson, Ind.; and Akron, Ohio.

Meanwhile, Cumberland, Md.-W.Va. was rated the nation’s most affordable small market, with 94% of homes sold in the fourth quarter being affordable to families earning the median income of $60,800.

It is followed by Wheeling, W.Va.-Ohio; Fairbanks, Alaska; California-Lexington Park, Md.; and Springfield, Ohio and Springfield Ill. (tied).

For the fifth straight quarter, Los Angeles-Long Beach-Glendale, Calif. remained the nation’s least affordable major housing market. There, just 7.5% of the homes sold during the fourth quarter were affordable to families earning the area’s median income of $80,000.

It is followed by Anaheim-Santa Ana-Irvine; San Francisco-Redwood City-South San Francisco; San Diego-Carlsbad; and Oxnard-Thousand Oaks-Ventura

The top five least affordable small housing markets were also in the Golden State. At the very bottom of the affordability chart was Salinas, Calif., where 9.7% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $80,900.

It is followed by Napa, Calif.; San Luis Obispo-Paso Robles-Arroyo Grande, Calif.; Santa Maria-Santa Barbara, Calif.; and Santa Cruz-Watsonville, Calif.