Housing affordability is as bad as it has been since 2008, according the National Association of Realtors’ Housing Affordability Index (HAI). Unfortunately, it’s only the beginning.
The NAR affordability index is based around three measures:
- 30-year fixed mortgage contract rate.
- Median family income.
- Median priced existing single family home
How is NAR’s housing affordability index calculated?
A housing affordability index of 100 means that a household with a median income has just enough income to qualify for a mortgage on a median-priced home. If the index is higher, it means the family has more than enough to qualify. NAR’s home affordability index assumes a 20 percent downpayment, which is quite the assumption considering how expensive homes are now, and a maximum debt-to-income ratio of 25% of the median family monthly income.
To illustrate, a NAR housing affordability index of 150 means that a family with a median income has 150% of the income needed to qualify for a conventional mortgage for 80% of the price of a median-priced existing single-family home (existing as opposed to a new home).
Housing affordability will get worse before it gets better
The only reason housing affordability has remained relatively high — the higher the number the more affordable housing is — is that the Federal Reserve has held interest rates artificially low for decades. That is about to change.
House prices were already rising at a breakneck speed, and now the Fed is starting to increase interest rates.
So, what does the future hold for housing affordability? It looks like housing prices will continue to increase in the short term and you can practically bet the farm on mortgage rates continuing to rise. So, it’s very likely housing affordability will get as bad as it has ever been before it gets any better.
The “perfect” storm
Homebuyers are facing a trifecta of high mortgage rates, high prices, and low inventory, the perfect storm for a housing affordability nightmare.
Prices will continue to increase in the short term due to a lack of inventory and ongoing demand.
The increase in mortgage rates will price out many families, which should slow down the increase in prices.
However, the cost of renting has also increased dramatically. So, demand will continue as long as owning is still cheaper than renting in most markets.
The Bureau of Labor Statistics (BLS) shows an increase of 4.2%. But that is not even close to the real-world increase in rental prices last year, which was between 15% and 18%. Check our Inflation Study for a deep dive into why the BLS undereports rent inflation.
How to deal with an unaffordable housing market
There is no easy solution for an overpriced housing market, but there are things you can do to reduce costs. Here are three tips for homebuyers who are struggling to afford a home:
1. Relocate to a more affordable area
Housing costs are highly dependent on location. If you can’t afford to buy a home where you currently live, consider moving to a location with more affordable housing. To illustrate, according to the latest NAR data (January 2022) housing is nearly twice as unaffordable in the West than the Midwest.
|Region||Median Priced Single Family Home||Median Family Income||Mortgage Payment as a % income||Affordability Index|
Small is beautiful (particularly for your budget)
One of the reasons homes are more expensive now is that they are so much bigger. You can save a lot of money if you’re willing to buy a house the size of your grandparent’s home. The bad news is houses that size are hard to find.
Ask for quotes from multiple lenders
It is more important than ever to compare multiple lenders to find the best possible rates and terms. Just asking for three or more quotes can save you thousands of dollars over the life of a loan. The mortgage comparison tool below is a good place to start.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.