US housing affordability is low despite drop in prices

The inability of potential buyers to purchase homes in the US currently provides the largest threat to growth in single-family home construction

Many economists are forecasting a decline in US home sales and housing starts in 2023.

According to data used in the National Association of Realtors’ Housing Affordability Index, significant issues have arisen that highlight housing’s current unaffordability.

Housing factors at play

One of those issues is the reversal in the relationship between median family incomes and the amount of money it takes to buy a house. To qualify for a home, the Housing Affordability Index uses a dollar amount based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a 20% down payment.

Last November’s index, the latest reading available, indicated it took $94,416 in annual income to qualify for a median-priced existing single-family home. However, to the chagrin of consumers looking to purchase a home, median family income had fallen below that figure, coming in at $90,211.

In fact, since May of last year, median family income has remained below the amount needed to qualify for a median-priced home in all but one month. That was in August, when the effective mortgage rate on loans closed on existing homes dropped to 5.29%, the lowest level since April.

Over the span of one year beginning in November 2021, the median price of an existing home went from $365,000 to a high of $420,900 in June, before falling to $376,700 near the end of last year, a gain of 3.2%. At the same time, median family income increased 5.3%.

However, the monthly principal and interest payment on a median home jumped 57.4% in one year, largely due to the rise in interest rates, thus sending the Housing Affordability Index from 142.7 down to 95.5.

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