Housing Affordability Reaches Lowest Point Since 1984, and the Trend Continues

The last time America’s housing market faced such unaffordability, Ronald Reagan was in the White House. Recent research from Intercontinental Exchange (ICE) reveals that it now takes nearly 41% of the median household’s monthly income to cover the principal and interest payments on a median-priced home. This development comes at a time when housing prices have surged uncomfortably high due to a bout with the worst inflation in a generation. With gas, groceries, and other living costs soaring, housing has consumed a more substantial portion of household incomes.

ICE, the owner of the New York Stock Exchange, reports that housing now claims the largest share of paychecks since 1984, marking a 0.4% increase from the previous month’s figures. In fact, this marks the least affordable housing market in the United States in 39 years, with the percentage of household income required for housing payment reaching the highest levels seen in decades.

Over the past 35 years, the proportion of household income needed to cover housing costs has increased significantly, averaging less than 25% during that time. Aspiring homebuyers are grappling with the challenges posed by high mortgage rates and elevated home prices. These twin obstacles have driven the principal and interest payments necessary to buy a median-priced home up by $144 in just the past month. For the first time, monthly payments have exceeded $2,500, and this does not even include taxes, insurance, or additional fees.

Andy Walden, ICE’s vice president of enterprise research, described the situation as dire, emphasizing that the recent surge in mortgage rates has exacerbated the problem. For many prospective first-time homebuyers, this issue is pushing the American dream further out of reach, forcing them to rent instead and delaying their ability to accumulate wealth through homeownership.

The turmoil in the bond market and the Federal Reserve’s battle against inflation have driven mortgage rates up to levels not seen since 2000. After seven consecutive weekly increases, the 30-year fixed-rate mortgage slightly dipped to an average of 7.76% in the week ending November 2, according to Freddie Mac. This rate is significantly higher than the pre-Covid level of 3.8% in the fall of 2019, although mortgage rates briefly fell below 2.7% in late 2020 and early 2021 due to emergency actions by the Fed.

Higher mortgage rates directly impact the affordability of homes. At current rates, the monthly payments on a $500,000 home, with a 20% down payment, would amount to approximately $3,265. This is $1,165 more than two years ago when mortgage rates were just above 3%. Despite the elevated borrowing costs, home prices continue to climb due to a supply shortage. US home prices reached a record high in August, marking the seventh consecutive month of increases, according to S&P CoreLogic Case-Shiller.

This situation has boosted the net worth of existing homeowners, leading to a 37% increase in net worth for Americans between 2019 and 2022, according to Federal Reserve data. However, younger Americans aspiring to buy their first homes are finding it increasingly challenging to enter the housing market. ICE points out that the last time housing affordability was this dire, the average home cost about 3.5 times median income. Today, this price-to-income ratio is significantly worse, at nearly six to one.