The Decline of Home Affordability: What Happened?

Home affordability has become a critical issue in recent years, with many prospective homebuyers finding it increasingly difficult to enter the housing market.

This article explores the factors contributing to this decline in affordability, focusing on four key metrics: the US median home price, 30-year mortgage interest rates, US household income, and the relationship between home payments and income. By examining these elements, we can better understand the dynamics at play and the challenges facing today's homebuyers.

The Evolution of US Median Home Prices

The median home price in the United States has experienced significant changes over the past few decades. This chart tracks the median home price from 1963 to the present, highlighting the trends and shifts that have occurred.

This chart tracks the median home price from 1963 to the present, highlighting the trends and shifts that have occurred

Explanation: The chart illustrates a steady increase in the median home price over the past 40 years. Key periods of rapid growth include the housing boom of the early 2000s, followed by a sharp decline during the 2008 financial crisis. Post-crisis, the housing market rebounded, with prices climbing steadily and even more steeply in recent years. Several factors contribute to this rise, including increased demand, limited housing supply, and various economic policies.

Key Points:

  • Early 2000s Boom: Low interest rates and money shifting from the stock market (after the tech bubble burst) contributed to rapid price increases.
  • 2008 Financial Crisis: A significant drop in home prices due to the housing market collapse, initiated by the Federal Government's change in traditional lending standards that blocked all but strong-credit consumers from the market.
  • Post-2008 Recovery: Gradual price recovery, accelerating due to factors like low inventory due to a lack of construction of new homes, low interest rates, and healthy demand.
  • COVID Pandemic: Disruptions in supply chains for the home construction industry, coupled with historically low mortgage interest rates led to explosive growth in home prices.
  • Post-COVID: Slowing sales due to mortgage interest rate shock while home prices continue to grow due to low inventory.
  • Bullish:  Generally, a bullish outlook on home prices makes sense and is supported by over 120 years of home price data. The simple reason is inflation. You don't think you'll buy a hamburger for less money in the future; why would you expect homes to be cheaper? Major government tampering causes most downturns, but as the graph above shows, the recovery is always strong and upward due to supply and demand dynamics.

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Trends in 30-Year Mortgage Interest Rates

Mortgage interest rates play a crucial role in home affordability. Lower rates generally make borrowing cheaper, increasing affordability, while higher rates have the opposite effect. This chart examines the changes in 30-year mortgage interest rates over time.

The chart shows the fluctuations in mortgage interest rates from 1972 to the present

Explanation: The chart shows the fluctuations in mortgage interest rates from 1972 to the present. Notable trends include high rates in the 1980s, a general decline through the 1990s and 2000s, and historically low rates following the 2008 financial crisis. Recently, rates have started to rise again, impacting affordability.

Key Points:

  • 1980s: High interest rates, often exceeding 10%, made borrowing expensive.
  • 1990s and 2000s: Gradual decline in rates, enhancing affordability.
  • Post-2008: Rates dropped to historic lows, making home loans more affordable.
  • Recent Trends: Rates have risen to double the market low of a few years ago, contributing to affordability challenges.
  • Today's Rates: Many people who would like to move cannot, as they would need to borrow money for the next home at a rate more than double their existing rate.
  • History:  Today's "higher rates" are below the 50-year average. For the past 45 years, the trend has been declining rates, often making it possible for the move-up buyer. Home refinances and sales were an economic boon for the US economy. It's not likely we'll see declining rates any longer, rather history suggests we should see an equivalent period of generally rising rates.

Changes in US Household Income

Household income is another critical factor influencing home affordability. This chart tracks the median household income over time, providing insight into whether incomes have kept pace with rising home prices.

he chart demonstrates changes in median household income from 1984 to the present

Explanation: The chart demonstrates changes in median household income from 1984 to the present. While there has been a gradual increase, the rate of income growth has not kept pace with the rise in home prices, contributing to the affordability crisis.

Key Points:

  • Steady Growth: Median household income has generally increased over time.
  • Income Stagnation: Despite growth, income increases have been modest compared to home price inflation.
  • Recent Trends: Incomes have risen more noticeably in recent years but still lag behind home price increases. The data for 2023 and 2024 have been estimated as the US Census has not yet published it.
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The Combined Impact on Home Affordability

To understand the overall impact on home affordability, looking at the interplay between home prices, mortgage rates, and household income is essential. This chart combines these factors to show the principal and interest payments on the median-priced home as a percentage of the median household income.

This composite chart highlights how the affordability of homes has changed over time

Explanation: This composite chart highlights how home affordability has changed over time. By calculating the monthly principal and interest payments on the median-priced home and expressing these payments as a percentage of median household income, we can see how affordable or unaffordable homes have become for the average American family.

Key Points:

  • 1980s: High mortgage rates made home payments a significant portion of household income.
  • 2000s Boom: Despite rising home prices, lower interest rates initially kept payments more manageable.
  • 2008 Crisis: A temporary improvement in affordability due to falling home prices, despite high unemployment.
  • Post-2008: Initially improved affordability with low interest rates, but rising home prices soon outpaced income growth.
  • Recent Trends: Increasing mortgage rates and skyrocketing home prices have significantly worsened affordability, taking us back to levels last seen in the 1980s.
  • Median: This graph clearly shows that the median-priced home is not affordable for the median household income family today, as the payment does not include taxes and insurance.

Detailed Analysis and Discussion

Understanding the historical context is crucial to grasp the current state of home affordability. In the 1980s, high mortgage rates, often exceeding 10%, combined with relatively lower home prices, made homeownership challenging despite lower nominal home costs. The subsequent decades saw significant economic changes, including deregulation, technological advancements, and shifts in labor markets, which influenced both household incomes and home prices.

Economic Policies and Their Impact

Government policies, including tax incentives, housing subsidies, and monetary policy, have also significantly shaped the housing market. For instance, the Federal Reserve's policies on interest rates directly affect mortgage rates. The low-interest-rate environment post-2008 was aimed at stimulating the economy but also contributed to rising home prices by making borrowing cheaper. The historically low rates made available during the pandemic created a rush on housing, pushing home prices up by double-digit percentages for nearly three years.

Supply and Demand Dynamics

The fundamental economics of supply and demand have heavily influenced home prices. In many regions, especially urban areas, new housing supply has not kept pace with demand. Factors such as zoning laws, NIMBYism, construction costs, and land availability have constrained supply, while demand has been driven by population growth, urbanization, and investment in real estate.

The government's decision to discontinue loan products for below-average credit borrowers caused the housing market to collapse in 2008. During the recovery, without these loans, builders slowed the construction of "affordable" homes and focused on larger homes when interest rates fell. Today, the US is roughly 10 million homes short, and inflation has run to the point where builders can no longer deliver the lower-priced homes needed.

The Role of Speculation and Investment

Real estate has increasingly become an investment vehicle, with both domestic and international investors buying properties, often driving up prices in the process. Speculative buying can inflate prices beyond what local incomes can support, exacerbating affordability issues for residents. We often hear cries of stopping hedge funds from buying homes, but that would be like putting a bandaid on a severed artery. The US needs to build more homes and let the supply of new housing curb soaring prices and rents.

The Impact of Wage Stagnation

While household incomes have generally increased over the past few decades, the rate of increase has been modest compared to the rapid rise in home prices.

While household incomes have generally increased over the past few decades, the rate of increase has been modest compared to the rapid rise in home prices

Wage stagnation, particularly in the middle- and lower-income brackets, has meant that many households have not seen their purchasing power keep pace with housing costs. This disparity has been a significant factor in the decline of home affordability.

Current Market Conditions and Future Outlook

The housing market today is characterized by high prices and increasing mortgage rates. As interest rates rise, the cost of borrowing increases, further straining affordability. Looking ahead, several factors will influence the future of home affordability:

  • Economic Conditions: Overall economic health, including employment rates, wage growth, and inflation, will impact household incomes and housing demand.
  • Policy Interventions: Government policies aimed at increasing housing supply, regulating investment, or providing subsidies could influence affordability.
  • Technological Innovations: Advances in construction technology and changes in housing preferences (e.g., increased remote work leading to shifts in demand from urban to suburban or rural areas) may also play a role.
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Returning To A Renter Nation?

The decline in home affordability is a multifaceted issue driven by rising home prices, fluctuating mortgage rates, and relatively stagnant household incomes. The interplay of these factors has made it increasingly difficult for many Americans to afford homes, particularly in high-demand areas. Addressing this issue will require a comprehensive approach, including economic policies that promote wage growth, strategies to increase housing supply, and measures to manage demand and investment in real estate.

The decline in home affordability is a multifaceted issue driven by rising home prices, fluctuating mortgage rates, and relatively stagnant household incomes

As we look to the future, we must continue monitoring these key metrics and adapt strategies to ensure that homeownership remains an achievable goal for the average American family. Understanding the past and present dynamics can help policymakers, economists, and individuals make informed decisions to navigate the complex landscape of the housing market.

The graph above shows that the US homeownership rate is fractionally lower than its all-time high recorded 20 years ago. Bold leadership from local politicians with supply-side solutions is needed to ensure we do not return to pre-WWII levels when fewer than 50% of Americans own their homes.

In summary, the journey toward improving home affordability involves balancing various economic forces and implementing thoughtful policies that consider both short-term and long-term impacts. By doing so, we can work towards a more equitable and sustainable housing market that benefits all members of society.

There are a lot of people who endorse Joe for the job of selling your home, including Preston Scott (host of Tallahassee's top daily "Audio Magazine," as well as the thousands of happy customers Joe has helped in the past. Listen why!

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