New Homes More Unaffordable Than During Housing Bubble

The downward revision of monthly median household income estimates from March 2021 confirms the picture for new home affordability in the Biden era is worse than previously indicated.

That’s saying something, because the old picture was already bad, with the median new home sold out of affordable reach for the typical American household.

The new picture reveals the unaffordability of new homes has routinely exceeded the peak of unaffordability recording during the early-2000s housing bubble in nearly every month since April 2022. Through August 2023, it remains well elevated above that threshold, as measured by the percentage of median household income needed to pay the mortgage payment on the median new home sold.

In this chart, March 2021 marks the last time new homes were fully below the 28% threshold of unrestricted affordability for median income-earning households. They had held below that thresdhold in the period from May 2019 to March 2021.

After the revisions to account for the much slower growth of median household income that has occurred since March 2021, the level of unaffordability rose slowly through March 2022, then rose rapidly as mortgage rates surged, with the peak of unaffordability reached in October 2022. The mortgage payment on a new home sold during that month would have consumed 52.9% of the income earned by a household at the exact middle of the distribution of income in the U.S.

Since that spike, the percentage of a median income-earning household needed to pay the mortgage on new home has fallen back to range between 41.3% and 45.1% during 2023. These levels either match or exceed the peak of unaffordability recorded in April 2006 during the housing bubble. They are also well elevated above the 36% level that mortgage lenders have historically set as the threshold of affordability for home owners to be allowed to take out a mortgage to buy a home provided they have no other household debt.

The next chart updates the picture for the raw measure of new home affordability, which presents median household income as a percentage of the sale price of the median new home sold.

Since this chart also presents annual data to provide a longer timeline, it incorporates the annual median household income data for 2022 that was released by the Census Bureau in September 2023. The monthly data series tracks back to December 2000, but its revisions are contained in the period since March 2021, coinciding with the slower growth in median household income realized since then according to the Census Bureau’s data. The monthly data, which utilizes our monthly median household income estimates, tracks closely with the Census Bureau’s annual data.

The revised monthly data indicates new homes set a record low for the “raw” affordability of new homes in December 2022, when this measure bottomed at 16.0%. During 2023, falling prices for the median new home sold in the U.S. has improved the raw affordability mesure during the year-to-date in 2023.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 26 September 2023. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 26 September 2023. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 29 September 2023. Note: Starting from December 2022, the estimated monthly mortgage rate is taken as the average of weekly 30-year conventional mortgage rates recorded during the month.

Image credit: “Key House Keychain” image by kalhh from Pixabay.