Home affordability is the worst it has been since 1984

Buying a house requires a much bigger slice of people’s income now — making this the most unaffordable housing market since 1984, by one measure.

And that crushing lack of affordability isn’t expected to improve much in the near future.

In just the last few weeks, US home prices rose for the first time in months and the 30-year fixed mortgage rate hit a 22-year high of 7.23%.

That has made what was already a dismal affordability picture even worse.

At today’s rates, buying a median-priced home would require a monthly principal and interest payment of $2,440 for those making a 20% down payment, according to Black Knight, a mortgage technology and data provider.

A subdivision has replaced the once rural landscape on July 19, 2023 in Hawthorn Woods, Illinois. With homeowners reluctant to sell their homes and give up their existing low mortgage rates the demand for new homes has spiked.

The rising cost of shelter represented 90% of last month's inflation

That’s $1,172 a month more in mortgage payments from just two years ago, before the Federal Reserve raised its benchmark lending rate 11 times in 18 months, Black Knight found. It’s a 92% increase — and is taking a growing chunk out of household budgets already facing inflation on many fronts.

Currently, 38.6% of the median household income is required to make the monthly payment on the average home purchase, making housing the least affordable it’s been since 1984, according to Black Knight.

“To put today’s affordability levels in perspective, it would take some combination of up to a 28% decline in home prices, a more than 4% reduction in 30-year mortgage rates, or up to a 60% growth in median household incomes to bring home affordability back to its 25-year average,” said Andy Walden, vice president of enterprise research and strategy at Black Knight.

What is affordable?

A home that is “affordable” can mean different things to buyers with varying resources.

But housing policy makers typically go by a standard threshold that paying anything over 30% of household income is “unaffordable.” Promoting policies that keep housing costs below that level is intended to ensure households have enough money for all their expenses. Households that spend more than 30% of their income on housing costs are considered “housing cost burdened.”

A "For Sale" outside a home at Di Lido Island in Miami Beach, Florida, US, on Wednesday, Feb. 1, 2023.

Shopping for a home? There's a lot working against you right now

Rising housing costs over the past few years — and incomes that have not kept pace — are taking a bigger bite out of the typical income.

Between 2019 and 2021, the number of cost-burdened homeowners increased by 2.3 million households, to 19 million, according to a report from the Joint Center for Housing Studies of Harvard University. That includes 8.7 million people, or 23% of all homeowners, who were severely cost burdened and paying more than half their income toward housing.

The number of cost-burdened renters increased by 1.2 million, to a record 21.6 million households, between 2019 and 2021. That impacted the purchase market, since people who are cost burdened as renters will likely struggle to be able to save enough money to purchase a home.

In all, 40.6 million households were housing-cost burdened in 2021, including 20.3 million who were severely burdened.

Affordability picture remains grim this year

Hopeful house hunters continued to face challenging affordability conditions in July as rising mortgage rates and historically low housing inventory pushed prices higher, said Edward Seiler, the Mortgage Bankers Association’s associate vice president for housing economics.

That made for a one-two punch that pummeled mortgage applications and home sales activity, Seiler said.

“With mortgage rates currently above 7% and expected to remain above 6% by the end of the year, affordability will remain a hurdle for many households looking to buy a home,” he said.

In an aerial view, single family homes are shown in a residential neighborhood on May 10, 2022 in Miami, Florida.

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US homebuying costs are projected to remain elevated through 2024 at least, according to an analysis by Moody’s Investors Service.

That means cash-strapped households could cut spending on new homes and discretionary purchases and shift demand toward rentals and lower-cost housing, Moody’s analysts said.

Home buyers have already shown rate sensitivity. Existing home sales fell to their lowest levels over the past year when rates topped 7%. With costs this high, buyers are simply walking away from the housing market: Applications for home purchase mortgages dropped to their lowest level since April 1995 last week.

Low housing inventory is keeping prices up

The inventory of homes on the market remains stubbornly low after many homeowners bought or refinanced into a mortgage rate at historical lows of 2% or 3%. That leaves no motivation to sell their home and buy another one.

Nearly half of all mortgage holders have a rate of 3% or less, according to Black Knight. Over 90% have a rate of 6% or less.

“Low housing supply is keeping home prices high in many markets, adding to the affordability hurdles buyers are facing,” said Joel Kan, MBA’s vice president and deputy chief economist.

A house is for sale in Arlington, Virginia, July 13, 2023. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

Just 1% of all US homes changed hands so far this year

Yet the tipping point of a lower interest rate that will motivate these homeowners to sell, adding inventory to the starved market, seems far off.

“We haven’t seen any indication of sellers returning to the market yet, even when 30-year rates fell below 6% early this year,” said Walden. “So exactly where that tipping point lies has yet to be seen.”

It’s clearly well below where rates stand today, he said.

“Unfortunately, given today’s lack of inventory and affordability levels, it may take years before home affordability returns to more ‘normal’ levels,” he said.