Economic Trends and Their Impact on Housing Affordability
Affordability has been a long-standing issue in the U.S. housing market, and it has only gotten worse over the last several years. According to the National Association of Realtors, affordability reached a record low in 2023, with many American families earning less than needed to buy a median-priced home. Historically, families earned about 40% more than required, allowing them to afford homes priced above the median. After the 2012 housing downturn, affordability improved, with families able to buy homes nearly twice the median price. This has not been the case for quite some time. However, as mortgage rates drop, NAR’s Housing Affordability Index suggests affordability will improve.
Housing affordability has often been associated with broader economic cycles and demographic trends. For instance, in the late ’70s, the economy was struggling significantly. Inflation surged to 14%, driving up consumer prices and home prices. When mortgage rates reached 17% in 1981, many people could no longer afford the higher mortgage payment, slowing down demand for housing. Does this ring a bell? Starting in 2022, the Federal Reserve raised its interest rates a total of 11 times to combat elevated inflation. As a result, mortgage rates have reached 7% on average in 2023, driving home buying out of reach for many people.