• Mortgage affordability has worsened nationwide, contributing to the slowdown in prices and sales.
• Buying a home is much less affordable now than it was earlier this year and in the roughly 15 years preceding the pandemic.
• It’s unlikely that affordability will meaningfully improve and/or return to pre-pandemic norms anytime soon. 

Housing affordability has become the highest barrier for both buyers and sellers in today’s housing market. Throughout the pandemic, as prices rose to never-before-seen heights and inventory plummeted to their lowest level in at least 40 years, low mortgage rates helped keep monthly payments affordable for most home buyers who could afford a down payment. But now that rates are soaring, that monthly payment is climbing out of reach for many. In fact, the share of household income that a monthly mortgage payment on the nation’s typical home comprises is now significantly higher than it was in the nearly two decades preceding the pandemic, putting affordability at the top of the list for major challenges facing the housing market. 

A deep cut to home values or a significant bump to incomes are not likely to take place in the foreseeable future, meaning would-be buyers are going to be waiting a long time for the market to become affordable in the way it once was and may need to change their expectations in order to remain competitive in this market. 

Mortgage affordability is worsening in the face of rising rates

The purchase of the nation’s typical home comes with a monthly mortgage payment (just principal and interest) that is 55% (or $658) higher than it would have been at the beginning of this year. Put differently, nationally, the median household could now expect to spend 30.2% of their income on principal and interest payments alone — not including taxes and insurance – when buying the nation’s typical home. This pushes the median household into the realm we consider “housing burdened,” which occurs once households spend more than 30% of their income on housing, leaving less money left over for other obligations and making qualifying for a mortgage on the basis of their debt-to-income ratio more challenging. The historical average share of income households spend on their mortgage payments (from 2005-2021) is only 22.8%, 7.4 percentage points lower than it is now, leaving today’s buyers in a tough spot. A return to that long-run average would take a meaningful shock to affordability (either in terms of prices or rates falling or incomes rising). 

Sellers are not immune to these affordability challenges either. The housing market strongly favored sellers over the past two years, but now as the market is rebalancing, many would-be sellers are hitting reset on their position within the market. Over two thirds of home sellers (71%) turn around to become home buyers, meaning the challenge of an expensive mortgage is on the minds of this group as well. Not to mention the fact that over 90% of current mortgages have less than a 6% interest rate, and nearly two thirds have less than a 4% rate, causing many homeowners to feel locked-in to their existing mortgages. Even for a household that is downsizing to a lower-priced home — one that has still appreciated a lot over the past three years — a new mortgage payment would likely be much higher than their existing payment. This phenomenon of homeowners feeling locked-in to their low mortgage rate is leading to a pull back in new listings hitting the market. New listings in September were down 16% from September 2021, and year-to-date 11% fewer homes have been listed than in the same period in 2019 (before the pandemic). 

Fewer homes hitting the market is contributing to a slowdown in home sales. 2022 is expected to see 15.7% fewer sales than 2021, which was a very strong sales year. Fewer new listings — both from existing home owners staying put and new construction output declining — also will keep more upward pressure on prices, even as demand is falling, so the chance for a rapid drop in home values remains unlikely. Zillow’s home value forecast predicts a flattening of home values over the next year, not a significant drop. And a panel of experts in a recent Zillow survey indicates the majority expect a return to typical appreciation rates — somewhere in the 2% to 5% range — starting in 2024. So while the days of 20% home value appreciation are behind us, significant depreciation does not appear to be in front of us. 

Affordability is unlikely to recover any time soon

Mortgage affordability hinges on two main factors: mortgage payments, which are influenced by both home values and interest rates, and incomes. Home values are not expected to become more favorable to buyers anytime soon largely due to constrained inventory and high pent-up demand, as illustrated above. And mortgage rates, which are approaching 7%, are likely to stay much higher than the sub 3% lows seen in 2021. This leaves incomes as the last resort for potential home buyers to find any hope unlocking an affordable housing market. 

Nominal income growth over the past year has been strong but it is no match for stubborn core inflation, leaving real incomes and purchasing power down from a year ago. Fears of an impending recession and a dwindling share of corporate income going to workers does not shed a positive light on the upside of wages increasing in the next year. So while prices and mortgage rates are expected to stay high and incomes are not expected to meaningfully increase, the affordability outlook on mortgages is bleak.  

To put the affordability outlook in context, in order to return to the historical average share of household income spent on a mortgage — 22.8% nationally — with mortgage rates at 6.5%, home values would need to fall 24.7% down to $269,686 (putting homes values back to where they were in fall 2020). All of the 50 largest markets would need to see some extent of a price drop to get back to their historic affordability figures, from a 2.4% drop in Hartford to a more than 40% drop in Ogden, Utah. 

It would take a sharp increase in inventory for home values to fall that dramatically, an unlikely outcome with a slowing home construction market, hesitant homeowners, and high pent-up housing demand. This data does illustrate how difficult the next several years of the housing market will be for buyers as affordability will continue to be a major challenge. 

Buyers who are trying to wait out the market — for things to become more affordable again — will likely be waiting for a long time. The outlook on inventory suggests that the market will be tight for years to come as demand for housing stays strong. While prices are falling modestly now as the market rebalances, long-term prices are still going to appreciate, and with high mortgage rates looking to stick around, future affordability is threatened.