Housing Affordability Drops To Lowest Level Since 2006

The National Association of Realtors (NAR) recently released its monthly Housing Affordability Index (HAI) report, showing a dramatic decrease in the typical American family’s ability to purchase a new home.

The HAI dropped to 102.5, almost 50 points lower than 2021 and the lowest it’s been since 2006, when it bottomed out at 100.5. Here’s a summary of the report. But what do these numbers mean, and how do they affect the average homeowner or buyer?

What Does Housing Affordability Mean?

Economists use several measurements of housing affordability, with the HAI the most high-profile index.

Created and maintained by the NAR, the HAI measures the typical family’s ability to afford a loan on a median-priced U.S. home. To do this, the HAI takes into account current effective mortgage rates, typical single-family home prices and typical family income.

Of course, “typical” needs some clarification. The NAR web site describes it this way:

“A typical home is defined as the national median-priced, existing single-family home as calculated by NAR. The typical family is defined as one earning the median family income as reported by the U.S. Bureau of the Census. The prevailing mortgage interest rate is the effective rate on loans closed on existing homes from the Federal Housing Finance Board.”

Here, we’ll cut straight to the results: When the HAI is close to 100, the typical family barely qualifies for a loan on the median-priced American home. An index of 150 indicates the typical family has 50 percent more income than needed to afford the same home, while an HAI of 70 puts that family 30 percent short.

What the HAI does not indicate is the affordability for a specific home for a specific buyer. Rather, it measures the overall “temperature” of the housing market and indicates potential pitfalls for homeowners down the road. The HAI also doesn’t account for ongoing home ownership costs like property taxes, insurance and maintenance.

HAI can vary by region, too. The HAI for the Midwest is 140.5, far above the national average, while in the West it falls far below (69.8).

What Causes a Low Housing Affordability Level?

Mortgage rates

When the Federal Reserve hiked interest rates to combat inflation, mortgages rates rose as well. According to the NAR, over the last year average mortgage rates spiked from 3.01% to 5.31%. Higher mortgage rates can make a home less affordable, even if the listing price remains the same.

Home prices

Of course, home prices have increased dramatically the last two years. The pandemic had a huge impact on housing demand, but the lowered supply, particularly in starter homes, has been an issue since the 2008 housing crash. The reasons why are a topic in themselves, but a good overview can be found in this Forbes article.

Family income

While the median family income has increased over the last year, it hasn’t kept pace with housing prices and mortgage rates.

What Are the Effects of a Low Housing Affordability Level?

These can be difficult to say with certainty, but here are a few common predictions.

Potential price spiral

Less-affordable homes force some potential homebuyers out of the market and build savings for a time housing is more affordable. With fewer buyers, many builders slow construction of new homes, putting upward pressure on existing home prices. Lowered demand for permits and housing starts suggest this is true.

Decreased savings and spending

Homebuyers who purchase a less affordable home may find themselves struggling to build savings or cover unexpected expenses. This is especially true for first-time homebuyers.

Potential bellwether

Some economists and pundits believe the HAI indicates future economic performance. Infamously low housing affordability in the late 70s/early 80s proceeded the Savings and Loan crisis, while an HAI drop in the mid-2000s preceded the housing crisis and Great Recession.

Time will tell if the current decline in housing affordability is an ongoing trend or a short-term dip. The next quarterly HAI will be released on August 11.

Article source here: Housing Affordability Drops To Lowest Level Since 2006