Housing Affordability Issues Are Accelerating
Updated: Nov 4, 2019
By Kelsi Borland
Home affordability is at its lowest level in 10 years, and with rising mortgage rates, the deterioration of affordability is accelerating.
Home affordability issues are worsening. According to a new report from ATTOM Data Solutions, national home affordability is at its lowest level in 10 years. Home affordability currently ranks 92 on the research firm’s index, with 100 representing a balanced market. This is the second consecutive quarter that home affordability has fallen below 100 on the index. A disconnect between housing price appreciation and income growth has been the primary drive of affordability issues across the country.
“We have seen affordability deteriorating over the last six years because of the disconnect between home price appreciation and wage growth,” Daren Blomquist, SVP at ATTOM Data Solutions, tells GlobeSt.com. “Home price appreciation has consistently outpaced wage growth over the past six years of the housing recovery. To put some numbers on that, we saw that home prices nationwide bottomed out in the first quarter of 2012. Since then, median home prices nationwide are up 76%, and during the same time, average weekly wages are up 17%. So, over the past six years, home prices have grown at a pace that is more than for times as fast as wages.”
The problem of housing affordability is accelerating. While this disconnect has driven housing affordability problems for the last six years, increasing mortgage rates are putting additional pressure on affordability. “This year, we reached a tipping point. Home price affordability deterioration accelerated because of rising mortgage rates,” explains Blomquist. “That really tipped affordability over the edge when it comes to our index. In the second and third quarter of this year, we have seen the affordability index drop below 100. We really chock that up to not only the disconnect between home prices and wages but also the added pressure from rising mortgage rates.”
This is the lowest level of affordability on the index since the third quarter of 2008, when affordability had reached a low-point at the start of the recession. Following the third quarter 2008, affordability improved through the end of 2012. As a result, this could be an indicator that the housing market is once again overheating. “Affordability is a great metric to look at for the housing market,” explains Blomquist. “With affordability heading in the direction that it is, is an indication that the market is running hot. The big question going forward is will we become overheated. The market is definitely running hot in a majority of areas across the country. If affordability continues to deteriorate at this rate, we could be in danger of being overheated and seeing another correction as a result. The more favorable scenario is that the market reacts in a different way and we see home price appreciation slow down so that income growth can catch up.”
Housing price appreciation in 2008 was driven mostly by huge demand, and today it is driven mostly by supply issues. That is a significant difference that could ward off another housing market correction. “The difference in this housing boom is that it is more supply driven, meaning the scarcity of supply,” says Blomquist. “Last time, it was more demand driven. The loan products available there was demand from buyers that really couldn’t afford the houses that they were buying. Lending today is tight, and you are not seeing demand from buyers that can’t buy homes. Prices are continuing to go up because of the limited inventory. That does put us on more stable ground for avoiding a major correction.”
While the dearth of supply is at the heart of the affordability issues, it is more complicated that simply building more housing. “Builders have a difficult time making the numbers work so that they can build homes that are affordable. It becomes a little more complex,” adds Blomquist. “If you can build homes that are affordable for a big pool of buyers, then that is a great solution, but it is tough to do that in many markets.”