The Challenge of Affordability in the US Housing Market

The US housing market is currently facing an affordability crisis of such magnitude that achieving a state of affordability will necessitate significant changes. According to Andy Walden, the Vice President of Enterprise Research for ICE Mortgage Technology, addressing this issue would require one of three substantial adjustments: a 35% correction in home prices, a 4% decline in 30-year mortgage rates, or a 55% increase in income to normalize the market. Walden emphasized that these changes are monumental and unlikely to occur in isolation, emphasizing the complex interplay of factors at play.

These insights come amidst a backdrop where US home sales have been declining even as home prices remain robust. In August, new home sales plummeted by 8.7% to a seasonally adjusted annual rate of 675,000 units compared to the previous month, according to the latest data from the US Census Bureau. While August new home sales demonstrated a 5.8% increase from the previous year, a mere 16% of consumers perceive the present time as favorable for home purchases, as indicated by Fannie Mae’s most recent Home Purchase Sentiment Index released on Monday.

This perceived lack of affordability is occurring despite the US housing market’s remarkable growth, with its total value surging by approximately 50% from the pre-pandemic levels of January 2020 to nearly $52 trillion, as reported by Zillow on September 26.

Andy Walden elucidated the current market dynamics, stating, “Demand has hit its lowest point during the pandemic over the last three weeks, certainly kind of constraining the market and affordability at its lowest level in 40 years. You’re seeing this constrained demand and further constrained expected from these rising rates.” Indeed, the average 30-year fixed mortgage rate reached a 23-year high of 7.49%, according to the most recent data from Freddie Mac.

Despite subdued consumer demand, the direction of the market hinges largely on the volume of inventory entering the market amidst a supply shortage. Walden posed the critical question of how inventory will evolve in the coming months, stating, “The big question when it comes to how will the market react is what’s inventory going to do? Are we going to see any kind of inventory building here over the next few months? If so, yeah, it could cool prices down. If not, you’re going to just see this stalemate play out in the market.”