Housing Affordability Update: US Homes Are Too Expensive for Average Buyers  

Can’t afford a home? You’re not alone. Housing affordability improved incrementally based on preliminary data for September 2023. the affordability index landed at 94.1, a two-point increase over August 2023. Even with that improvement, housing affordability is still not a rosy picture.

Estimating housing affordability

The National Association of Realtors (NAR) projected that the national median house price was $399,200. Mortgage rates at that time averaged 7.28% for closed 30-year loans, as reported by lender Freddie Mac. The NAR further projected the median household income as $98,705. Factored in together, that put the index at 94.1 for September. The index sets “100” as a balanced market, so the higher the number, the more buying power households have. 

As you look closer at the different regions, housing affordability is much less than a year ago. For example, the index was 106.6 last year in the Northeast, whereas it was 93.7 in September 2023. The Midwest saw the most significant drop, declining 17 points year-over-year. The American West had the worst housing affordability, indexed at 66.

What affordability tells us about the market

The Housing Affordability Index (HAI) provides a snapshot of the affordability landscape in different areas by comparing the prevailing costs of homes with families’ income levels. The HAI is a crucial metric to assess whether an average family possesses adequate income to qualify for a mortgage loan on a standard home. This evaluation is conducted on both a national and regional scale, considering the most up-to-date information on housing prices and income levels. 

As the housing market is dynamic and subject to fluctuations, regular assessments using the Housing Affordability Index contribute valuable information to policymakers, real estate professionals, and individuals seeking to understand the real estate market dynamics. 

Affordability still challenged

Besides the updated HAI, the Case-Shiller US National Home Price Index was released the same month and found that housing prices increased by 0.2%. Prices are now at their highest level since the index was created, rising in the United States in the seventh month.

This index looks at 20 major metropolitan areas in the United States to gauge how home prices are moving. Prices have increased almost 4% in the last year, ending in September 2023.

Interest and lack of housing compounding affordability

Home prices are rising despite mortgage interest rates at their highest levels in two decades. While these figures are released for September, we know October hit a new multi-decade high of 8% interest rates. That should further challenge housing affordability across markets nationwide, but there are some markets where homes are a good deal..

Home prices are still rising despite these high interest rates on home loans because there are not enough homes for people looking to buy. The new construction market also needs to catch up with demand. 

That is exacerbating the affordability crisis, as it takes time to construct new homes. The lag in new builds means the needs of prospective buyers won’t be met for the foreseeable future.

How to Boost Affordability

If we can’t pull the lever in time to add inventory to the real estate market, the other way to make homes more affordable is through increased income. Unfortunately, wage growth has been challenged by the inflationary market. Yes, inflation has eased over the last few months, but the markets have yet to have the opportunity or the time to catch up with its impacts.

The most recent data on median household income from the Federal Reserve and the US Census says that the median household income 2022 was $74,580. Figures used in the HAI for 2023 are extrapolations based on 2020 US Census reporting, the American Community Survey, and economic growth measures. 

But, if you follow the 28% rule where that percentage of income is allocated for housing, a household would need to make $105,864 to purchase a $400,000 home if they had 20% saved for a down payment and had 30-year fixed rate mortgage of 6.88%. 

That disconnect shows the reality of today’s real estate market: buying the median house is still out of reach for middle-of-the-road Americans. That’s especially true in the West, where the median house price was $620,200. 

However, homes remained more affordable in the South, at $366,900, and in the Midwest, at $295,900. The Northeast had a median home price of $449,200.

Housing affordability will likely remain lower than two years ago as the year closes.