The Facts and Myths About America’s Continuing Housing Affordability Crisis

Since labeling the nation’s affordable housing crisis as the “coal in the holiday stockings” a year ago, the situation has significantly worsened as we close out 2023. Affordability has deteriorated across the nation impacting both the rental and home ownership sectors. 

The crisis extends beyond those with below median incomes to affect the majority of American households. The spike in interest rates this year has compounded the issue as home mortgage rates have soared. Additionally, inflation has increased the cost of constructing new housing units, compelling developers to charge higher prices for a reasonable return on their investment.  

Wages have grown but have not kept up with the rising cost of housing and are vulnerable to recessionary headwinds. Similarly, while the net worth of most American households has risen, down payments have grown with mounting home prices, keeping home ownership out of reach. Rental rates rose significantly during the past two years and are now moderating, but unlikely to drop anywhere near pre-pandemic levels. 

The Statistics of Affordable Housing 

The combination of higher mortgage rates and inflationary pressures has exacerbated the situation since early 2020. While much of the damage was done by the end of the 2022, conditions continued to worsen in the first three quarters of 2023.

Based on median home prices, a 20% down payment, and a mortgage interest rate that has grown from about 3.75% to about 7.50%, average monthly mortgage payments (excluding tax and insurance escrows) have doubled from approximately $1,200 at the beginning of the pandemic to approximately $2,400.

Growth in the Case-Shiller National Home Price Index paused mid-year but has resumed its climb in recent months and is now 6% higher than at the beginning of 2023, and a whopping 47% higher than at the beginning of 2020. The combination of higher home prices and higher mortgage rates has sent the NAR Housing Affordability Index tumbling from pre-pandemic 154.2 to 94.1 by the third quarter 2023, an almost 40% drop.

The NAHB Wells Fargo Housing Opportunity Index, which indicates the share of homes sold in a market that would have been affordable to a household earning the median income, fell from a 66% share of households in early 2020 to only about 37% of households today. Affordability is here defined as housing costs less than 28% of household earnings.

The NAHB’s Priced-Out Estimates compare the overall monthly cost of financing a home, including property tax and insurance escrow payments, and household income to determine how many households can afford ownership based on a 28% affordability ratio. In the latest study in March 2023, 96.5 million households, or 73% of all U.S. households were priced out of the home ownership market. The analysis also indicated that each additional 25 basis points in mortgage rate would price out another 1.3 million households. 

Since March, the 30-year fixed rate mortgage rate rose from 6.25% to about 7.5% a few weeks ago, or five, 25-basis-point increments. The number of priced-out American households has now surpassed 100 million, approximately 77% of all households. 

Sources: U.S. Housing Starts – Federal Reserve Bank of St. Louis; 30-Year Fixed Rate Mortgage – Freddie Mac; Priced Out Data – NAHB and EisnerAmper analysis

Challenging Misconceptions About Short-Term Affordable Housing Solutions 

Resolving the housing shortage and high home prices and rents is a complicated and long-term endeavor. Often easy, short-term solutions are described, where none truly exist. Comprehensive state and local plans, appropriate for each market, are required. 

Myth 1: The Fed lowering interest rates will solve the housing problem. 

Lower mortgage rates would improve affordability, but the Fed prioritizes short-term rates, and even if they decrease, mortgage rates may not follow due to the Treasury’s need to fund deficits, Fed balance sheet reductions, and other economic factors. Even with lower mortgage rates the price of homes, indicated by the Case-Shiller index above, would remain unreachable by many families.

Myth 2: Regulating rents is a long-term solution to high rental rates. 

Regulating rent growth may offer short-term relief to renters but doesn’t address the long-term issue. Increased regulation makes the market less appealing to new investment or development capital seeking reasonable returns, ultimately hindering the supply of units and diminishing long-term competitiveness for capital. 

Myth 3: Office conversions to multifamily will make rental units more affordable. 

We need more rental units but the number of units that will be added by office conversions will only be a small fraction of demand. Conversions are difficult and, more importantly, expensive. To be economical, conversions typically require luxury, not affordable, pricing when complete.

Myth 4: Recent stabilization of rent growth will resolve rental affordability.

Though rental growth has slowed nationally, local stories vary, with rents increasing in specific areas like New York City and the Midwest. Even if rents stabilize, households still face 20% to 30% higher costs than pre-pandemic levels, and in some markets even higher, demanding a significant influx of affordable units to achieve long-term rate reduction.  

Myth 5: The recent new supply of units will resolve affordability. 

The substantial delivery of over one million new rental units in 2023 and 2024 is curbing short-term rental growth. Yet, this surge in supply will rapidly slow in 2025 as developers wrestle with rising interest rates and construction costs. Homebuilding levels have risen, but increased costs contribute to higher sale prices. Existing home supply has effectively shrunk as homeowners won’t give up their low mortgage rates, sustaining higher prices despite a high mortgage rate environment.

Solving Affordable Housing Challenges Though Collaborative Solutions 

Further deterioration of housing affordability, reflected in the above statistics, underscores the need for swift, innovative partnerships between developers and state/local officials.

Local governments and real estate developers can’t control interest rates, but they can collaborate for a sustained annual supply of affordable units with reasonable returns to developers. However, current market dynamics pose a challenge, necessitating government incentives to spur cost-effective development and alleviate operational tax burdens.