Median-Income Earners Can’t Afford More Than Half of U.S. Homes

Less than half of the new and existing homes sold between the beginning of April and the end of June were affordable to families earning the U.S. median income of $96,300, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index.

The number came in at 40.5% as many are feeling the one-two punch of rising home prices, which have shown the median existing-home price appreciating 39.3% from June 2020 to June 2023, and rising mortgage rates, with the 30-year fixed rate increasing 127% over the same time frame.

“As most homeowners finance their purchase through a mortgage, the increase in prices and rising rates have led to a 3-year price change to the average mortgage cost of 115.7% when analyzing both prices and rates together,” Nick Grandy, construction, and real estate senior analyst with RSM US LLP, tells GlobeSt.com.

However, only 11% of US household debt has an adjustable interest rate, which means most Americans with existing fixed interest rate mortgages and auto or student loans have not been impacted by the Federal Reserve’s 11 rate hikes, cited Charlie Bilello, chief marketing strategist at Creative Planning.

One of the largest impacts on housing has been limited supply in the existing home market, which is significantly larger than the new home market, Grandy said.

“The supply shortage has been exacerbated by homeowners with ultra-low mortgage rates, who are unwilling to trade their homes and current mortgage rates for higher ones, according to recent Redfin data, 82.4% of homeowners have a rate below 5%, with 62% having a rate below 4%,” he said.

“This has pushed would-be buyers into the new home market, driving up opportunities for home builders, but also supporting the current pricing level for housing and keeping margins above pre-pandemic levels for home builders.”

When evaluating the consumer price index data from Aug. 10, shelter inflation was responsible for 90% of the consumer price index’s 0.2% monthly gain, Grandy said.

Because of the way shelter service costs are measured, changes tend to lag alternative real-time data measures, which have shown shelter costs have turned over.

Won’t Improve Any Time Soon

Christine Cooper, chief U.S. economist and managing director at CoStar Group, tells GlobeSt.com she thinks the situation is unlikely to improve soon.

“Mortgage rates are not likely to decline meaningfully as the 10-year Treasury, to which 30-year mortgages are typically pegged, remains at or above 4%,” Cooper said.

“Moreover, the spread between the two rates is at its widest since late 2008, during the heart of the Great Financial Crisis, now sitting at close to 300 basis points, compared to the average over the five-year pre-pandemic period of 170 basis points.

“This widening spread reflects uncertainty in economic conditions with recession risks still in view and lenders facing liquidity constraints and investors cooling their demand for mortgage-backed securities.

“Without relief in rates or prices, affordability will continue to challenge potential home buyers. We can hope, perversely, that the economy slows in response to the Federal Reserve’s aggressive tightening program, the full effects of which may not yet have been felt.

“If so, we will see the 10-year Treasury move lower, bringing mortgage rates down and the spread into a more normal range. This will at some point unlock more inventory as the difference between ultra-low rates of the pre-pandemic era and existing market rates will lessen, offering some hope for a more balanced housing market.”

FHFA reported last month that homebuyers’ debt-to-income ratios were approaching 40% at the beginning of the year, meaning they are spending 40% of their gross income on mortgage and interest costs – the same as in 2006, cited Nick Gerli, CEO of Reventure Consulting, said.

Testing a ‘New Foundation’ of Pricing

Mike Pappas, CEO of The Keyes Company, tells GlobeSt.com that the market is testing a new foundation of pricing.

“Due to the low supply, we are still seeing strong demand for properties priced properly and in good condition,” he said.

“Typically a homebuyer can invest up to 40% of their gross income toward their monthly mortgage payments – including real estate taxes and insurance. During the previous decade – with lower prices and lower interest we saw many buyers needing only to invest 25% of their income.

“The reality is – those days are gone – and now homeowners will need to stretch to buy in today’s market.”

Grandy said the continued increase in housing costs is “not a huge surprise though, as expectations are for shelter inflation to slow significantly over the next 18 months, with members of the Fed having said in June that inflation in housing services “has about peaked and are expected to move down over the rest of the year.”

With the Fed Rate likely staying at or above 5.25% to 5.50% for the rest of the year, Grandy said, it is unlikely that mortgage rates will fall to levels to support an increase in inventory levels from the existing home market.

“This will keep affordability suppressed for some time,” he said.

Lansing, Mich., Most Affordable Market in US

NAHB’s HOI shows that the national median home price increased to $388,000 in the second quarter, up from $365,000 in the previous quarter. Meanwhile, average mortgage rates were 6.59% in the second quarter, up from 6.46% in the first quarter.

Lansing-East Lansing, Mich., was rated the most affordable home market in the country, according to NAHB, and Cumberland, Md.-W.Va., was rated the nation’s most affordable small market.

For the 11th consecutive quarter, Los Angeles-Long Beach-Glendale, Calif., was the nation’s least affordable major housing market.

Tawn Kelley, President, Taylor Morrison Home Funding, tells GlobeSt.com that wages are also an important factor to consider when talking about relief, as “it’s unlikely that the interest rate, fundamentals of home prices, and costs will be significantly lower in the future.