Mirroring a steep rise in mortgage rates that began in the early part of 2022 and coupled with ongoing building material supply chain bottlenecks that increased construction costs, housing affordability posted three consecutive quarterly declines in 2022 and now stands at its lowest level since the National Association of Home Builders (NAHB) began tracking it on a consistent basis in 2012. However, a recent drop in mortgage rates over the past two months signals that declines in housing affordability may have reached their low point for this cycle.
According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), just 38.1% of new and existing homes sold between the beginning of October and end of December were affordable to families earning the U.S. median income of $90,000. This marks the third straight quarterly record low for housing affordability since the Great Recession, trailing the previous mark of 42.2% in the third quarter and 42.8% set in the second quarter.
“Rising mortgage rates, supply chain disruptions, elevated construction costs and a lack of skilled workers and lots all contributed to a declining housing market and worsening affordability conditions going back to the second quarter of last year,” said NAHB chairman Alicia Huey, a custom home builder from Birmingham, Ala. “But we are anticipating a better affordability climate in the months ahead, with mortgage rates already posting a modest drop since the beginning of the year and expectations that the Federal Reserve will end its latest string of interest rate hikes by the end of the first quarter.”
“With mortgage rates anticipated to continue to trend lower later this year, affordability conditions are expected to improve, and this will increase demand and bring more buyers back into the market,” said NAHB chief economist Robert Dietz. “Ultimately, the best way to reduce housing costs is for policymakers to put into place the right policies that will allow builders to produce more affordable housing by fixing broken supply chains, easing excessive regulations and ensuring sufficient liquidity in the housing market.”
While the HOI shows that the national median home price fell to $370,000 in the fourth quarter, it is still the third-highest median price in the history of the series, after the $380,000 price recorded in the third quarter and the all-time high of $390,000 in the second quarter. Meanwhile, average mortgage rates reached a series high of 6.80% in the fourth quarter, surpassing the previous record-high of 5.72% in the third quarter.
Most and least affordable markets
Indianapolis-Carmel-Anderson, Ind., was the nation’s most affordable major housing market, defined as a metro with a population of at least 500,000. There, 75.9% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $94,100.
The top five affordable major housing markets:
- Indianapolis-Carmel-Anderson, Ind.
- Rochester, N.Y.
- Pittsburgh, Pa.
- Toledo, Ohio
- Dayton-Kettering, Ohio
Meanwhile, Bay City, Mich., was rated the nation’s most affordable small market, with 88.5% of homes sold in the fourth quarter being affordable to families earning the median income of $74,800.
The top five affordable small housing markets:
- Bay City, Mich.
- Wheeling, W.Va.-Ohio
- Elmira, N.Y.
- Davenport-Moline-Rock Island, Iowa-Ill.
- Cumberland, Md.-W.Va.
For the ninth straight quarter, Los Angeles-Long Beach-Glendale, Calif., remained the nation’s least affordable major housing market. There, just 2.2% of the homes sold during the fourth quarter were affordable to families earning the area’s median income of $91,100.
The top five least affordable major housing markets, all located in California:
- Los Angeles-Long Beach-Glendale
- Anaheim-Santa Ana-Irvine
- San Diego-Chula Vista-Carlsbad
- San Francisco-San Mateo-Redwood City
- San Jose-Sunnyvale-Santa Clara
The top five least affordable small housing markets were also in the Golden State. At the very bottom of the affordability chart was Salinas, Calif., where 5.0% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $90,100.
The top five least affordable small housing markets, again all located in California:
- Santa Maria-Santa Barbara
- San Luis Obispo-Paso Robles
- Santa Rosa-Petaluma