How much lower? The National Association of Realtors produces a housing affordability index, based on single-family home prices, median family incomes and mortgage rates that has lately hit its lowest levels (signifying the lowest affordability) since 1985. What is striking is that even if mortgage rates declined significantly, this measure would still suggest houses are steep.
The same goes for a similarly constructed index from the Atlanta Fed. By its lights, the threshold for an affordable house is for mortgage and other housing payments to be 30% of household income. As of September, this measure showed that for the median household, the median-priced home was nearly 50% too costly to be considered affordable.
Take mortgage rates all the way down to 5%, versus September’s 7.2%, and the Atlanta Fed’s measure shows that housing costs are still nearly 25% beyond affordable. One way to make the numbers work at a 5% mortgage rate would, of course, be to boost household incomes by about 25%. The other would be to drop home prices by about 25%.
On the other hand, the speed with which home prices climbed, and the fact that so few homes are getting sold, might mean that prices might prove so sticky once supply starts to come back. Very few homeowners bought their homes for anything close to what they are fetching today, which means they would be unlikely to be selling at a loss. This includes many who bought after the Covid crisis hit: The peak month for existing-home sales in the pandemic period was June 2021; the National Home Price Index was 20% higher in September than it was then.
U.S. homes are worth a lot of money on paper. In a functioning market they would be worth less.
Drop in mortgage rates since October has made home purchasing slightly more affordable By Nicole Friedman Sales of previously owned ...Read More