Housing Affordability

Affordability has always been an issue. Mostly or at least, (I believe) it gets down to the matter of monthly payments which come from the mortgage cost, property tax, utilities, etc. You would think by now, there would be a better way to promote housing costs for first time buyers. Most of them can not come up with a 20% downpayment much less ten percent. It is at that level you get a better mortgage interest rate.

Bankers and government believe they are offering a first-time buyer a good financial deal. The first chart touches on how much of income goes to housing. The second chart depicts housing pricing.

“Prospects for Improving Housing Affordability,” Econofact,

– Jeffrey Zabel

The Issue:

There has been growing concern about the affordability of homeownership in the United States, particularly for first-time homebuyers. The rapid rise in house prices during the pandemic has been followed by a steep increase in borrowing costs in 2022, with average 30-year fixed mortgage rates remaining above 6% since September of 2022. Other costs have risen as well — higher prices of construction materials together with increasing damage from climate disasters have contributed to a significant increase in homeowner insurance premiums. In this context, affordability challenges have increasingly spread beyond historically high-priced coastal cities such as San Francisco and New York to sunbelt cities and beyond.

The Facts:

• The affordability of residential housing has declined markedly in the United States since 2022. The Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor tracks the median-income household’s ability to cover the annual costs associated with owning the median-priced home in a given market. Costs include payments of principal and interest at current mortgage interest rates, property taxes, property insurance and private mortgage insurance. If the annual cost of homeownership exceeds a 30 percent share of the annual median household income, homeownership is considered unaffordable. By this measure, homeownership has become increasingly unaffordable at the national level since the pandemic. As of July 2025, the annual homeownership cost of a median-priced house in the United States took up 47% of median household income — exceeding prior peaks before the 2008 financial crisis (see chart).

• The problem of affordability has been spreading beyond traditionally high-priced cities. Housing markets vary greatly across locations and national averages can obscure important regional differences. The American Enterprise Institute has generated an affordability measure for first time homebuyers for the 60 largest metro areas in the country, based on the ratio of median house prices to median household income for the years 2013-2023. The top three most affordable metro areas are Pittsburg, Cleveland, and Oklahoma City. What is interesting is that the typical least affordable places to live, San Jose, San Francisco, and Los Angeles, were the top three metros in terms of the change in affordability between 2013 and 2023. That is, they became relatively more affordable because their real house price growth rates were below average over this period. In contrast, the change in first-time homebuyer affordability has deteriorated the most since 2013 in cities like Boise City, ID, Dallas, TX, Cape Coral and Deltona, FL and Grand Rapids, MI.

• What has been driving the decline in affordability? The role that different factors have played in reducing homeownership affordability has varied over the past decade (see affordability drivers tab here). Rising house prices have been a consistent driver in the decline in affordability, especially during the pandemic. Mortgage rates spiked after the Federal Reserve began to raise interest rates in March of 2022 to counter inflation. The 30-year fixed rate mortgage reached a high of almost 7.8% in 2023, pricing homeownership beyond the reach of many households. Although at a smaller scale, the cost of property insurance has also played a role in declining affordability more recently. Inflation and the rise in the cost of construction materials combined with more frequent damages from climate change have contributed to a significant increase in homeowner insurance premiums. The average home insurance premium in the United States rose by 33% from $1,902 in 2020 to $2,530 in 2023, according to a recent study. 

• One of the top reasons for the drop in affordability is related to housing supply. The lower the housing supply the higher house prices will be. The United States faces a housing stock gap. While estimates of the shortfall vary, analysts agree that the available supply of housing in the United States has not been large enough to adequately meet existing demand. Overall, the U.S. has been building fewer housing units relative to the number of households over the past three decades than historical trends with land use restrictions and local zoning as important limiting factors (see here). More recently, supply has also been limited by what is known as “mortgage lock-out.” Many homeowners have a mortgage with a low interest rate obtained before the Federal Reserve began raising the Federal Funds rate to combat inflation in 2022. These homeowners are reluctant to sell their house and give up their low-priced mortgage. Furthermore, given the low supply of houses for sale, they are concerned that it will be difficult to find a new place to live and are reluctant to put their house on the market. Between 2015 and 2022 there was a sustained decrease in months of remaining housing supply, that is the number of months that it would take to sell the current inventory of homes at the current sales rate. This decrease in inventory is consistent with a “sellers” market. But there has been a turnaround since 2022 and the number of months of remaining housing supply has since been trending up (see chart below).

• Now that the Federal Reserve has started lowering the Federal Funds Rate what should we expect in response from the housing market? The 30-year fixed mortgage rate is more closely tied to the 10-year Treasury Bill rate than the Federal Funds Rate which is a short-term lending rate. Both the mortgage and Treasury bill rates appear to lead the Federal Funds rate by about 3 months. This means that some of the expected decline in interest rates has already been priced in: Between July and September, both the 30-year fixed mortgage rate and the Treasury bill rate have fallen, likely in anticipation of the Fed lowering the Fed Funds rate. Lower mortgage rates could relieve some of the “mortgage lock-out” effect, increasing housing supply on the market. And, lower mortgage rates could also increase demand for housing as more households become able to afford housing payments.

• Historically, the 30-year real fixed mortgage rate and real house prices tend to move in opposite directions — a decrease in mortgage rates can increase demand for housing resulting in higher prices. But this has not been the case of late. The U.S. residential house price growth rate has been falling since 2024 and the real year-over-year (YOY) real growth rate was negative in June 2025. This decline is happening even though the 30-year fixed mortgage rate has been falling recently and was, on average, 6.17 percent on October 31, its lowest value in almost a year. Of course, there is considerable heterogeneity across metro areas. Between the first quarter 2024 and second quarter 2025, 71% of the top 100 metro areas have seen positive real house price growth whereas 29% have experienced negative growth. For example, Detroit, MI and Rochester, NY experienced positive real house price growth rates, whereas Austin, TX and Sarasota, FL experienced negative growth. In fact, Austin and Sarasota sustained significant positive growth rates during the beginning of the 2020’s but then underwent significant declines.

What this Means:

What can we expect from the housing market going forward? First, we might expect the 30-year fixed mortgage rate to fall in anticipation of further interest rate cuts by the Federal Reserve but likely not by too much. House price growth rates are likely to continue to moderate. But the impact on new housing supply is likely to be minimal. Rising costs of building materials due to increasing tariffs and the decline in construction workers due to new federal policy to deport undocumented immigrants has certainly generated headwinds for the construction industry. The most important takeaway though, is that we are in unprecedented times. The U.S. housing market has shown a lot of variability recently, particularly since the start of the COVID pandemic in the spring of 2020. Federal immigration policy, tariffs, and climate change have added to the variability, adding to the uncertainty in any forecast of future market conditions.