Viewpoint
July 06, 2026 | 08:55
Housing: In Search of Affordability
Economics
Economics
Economics
Economics
Economics
Economics
Eight Economic Reasons for Americans to Celebrate |
| As the U.S. celebrated its 250th birthday, here are eight economic reasons to light up the sky.
No one really knows what the second half of the year will bring (after all, few had the Iran war on their bingo card at the start of the year). But for now, Americans had more good than bad economic reasons to celebrate Independence Day. |
Housing: In Search of AffordabilityAmid stable home prices and limited interest rate relief, income growth is what should improve housing affordability over time. |
| The cost of living and housing affordability are hot button issues heading into the midterms. On June 22, the Senate passed the 21st Century ROAD to Housing Act with an 85-5 vote, and the House of Representative passed it next day with a 358-32 tally (ROAD is an acronym for Renewing Opportunity in the American Dream). The Act has been touted as the most comprehensive housing legislation since the 1980s. However, there are no new funds authorized. Instead, it contains more than 50 measures altering existing regulations, establishing new directives, and refocusing existing programs. The goal is to encourage (among other things) increased supply of affordable housing via conversions, renovations, and manufactured/modular units, along with new construction. It also, for example, codifies one of the Administration’s objectives to restrict large institutional investors’ purchases of single-family homes. |
| Earlier this year in congressional testimony, the Chair of the National Association of Home Builders (NAHB) stated that “regulations account for nearly 25% of the cost of a single-family home and more than 40% of the cost of a typical apartment development.” To the extent the Act also eases some of this broad regulatory burden, it should be successful in increasing the supply of affordable housing, both on the rental and owner-occupied sides. However, unfavorable affordability levels are a factor affecting broad demand for (owner-occupied) housing, which is currently stuck in a multi-year rut. The Act does not address this directly. Total home sales (combining existing and new home sales) have been trending sideways since plummeting below the 5.0 million mark (annualized) in the wake of 2022’s rapid rise in interest rates and the record-paced price appreciation during 2021 and early 2022. This was an affordability double whammy which housing demand has yet to recover from. In May, total home sales were 4.74 million, stuck under the 5.0 million mark for more than 3½ years—the longest sustained housing market weakness since the Great Recession era (Chart 1). The combination of the highest 30-year mortgage rates in more than two decades and record-high home price appreciation left affordability at its worst levels since the 1980s. By the autumn of 2023, the Housing Affordability Index constructed by the National Association of Realtors (NAR) had hit its lowest level since the summer of 1985 (Chart 2). The index has since improved but remains below its median level, meaning affordability continues to weigh on demand for owner-occupied housing. There are three fundamental channels through which affordability can improve and support demand: lower home prices, lower mortgage rates, and higher incomes. Currently, none of them appear poised to provide a quick affordability fix for depressed housing demand. Prices: Coming out of the post-pandemic gate, existing home prices surged, with the major metrics hitting record paces of appreciation during 2021 and early 2022 (Chart 3). The surge occurred as housing demand outpaced supply with the former prodded by the run of record-low borrowing costs (at the time) along with the unleashing of demand pent up during the pandemic, and a severe case of FOMO among millennials. The subsequent surge in interest rates as 2022 unfolded quickly doused the price appreciation fire. However, prices didn’t decline much, if at all, despite the corresponding collapse in home sales. |
This was a surprise and it reflected the fact that the willingness of would-be sellers to list their homes also dropped sharply. Having refinanced their mortgages during the run of record-low rates, the arithmetic of replacing mortgages with rates sporting 2- and 3- handles with those sporting 6- and 7-handles was a turn-off for market turnover (welcome to the ‘lock-in effect’). This probably prevented home prices from broadly correcting with the consequence being that record-high home prices have persisted. This has kept prices at ‘unaffordable’ levels for many would-be buyers, although the pace of appreciation has slowed to a crawl. We don’t expect to see any price decline here. |
| Note that the new home segment (representing around 14% of total sales) has been experiencing steadily, albeit modestly, falling prices. In the three months ending in May, the median price was down 1.3% y/y (we use three-month averages given the volatility of the data). During the same interval in 2025 and 2024, prices were down 1.2% y/y and 0.9% y/y, respectively. However, these modest declines hardly make a dent in the 19.4% y/y gain in May 2023, which itself was slower than the record (63-year) high of 23.7% y/y recorded during 2022 Q4. Since the median price level peaked in October 2022, the cumulative decline has been 6.4%. We reckon new home prices will continue to move down (at least) modestly, owing to homebuilders’ mounting relative inventories. Months’ supply hit 10.3 in May, matching the highest level since early 2009. Meanwhile, homebuilders’ perception of demand remains depressed. The NAHB Housing Market Index was 35 in June, meaning only 35% of builders perceived 'good' demand conditions (or 65% perceived bad) (Chart 4). The index has been steadily below 50 for the past 34 months. Rates: According to Freddie Mac’s weekly survey, 30-year mortgage rates have stayed above 6.00% consistently since mid-September 2022 (apart from a one-week slip to 5.98% this February) (Chart 5). The latest weekly reading was 6.43%. Although below the recent peak near 7.80% (during October 2023), we reckon it’s still high enough to keep the above-mentioned lock-in effect in play, but to a lesser degree. According to a recent Redfin report 21.1% of mortgages now sport a rate above 6.00%, the highest share in a decade and triple what it was during 2022. Such is the legacy of nearly four years of rates above 6.00%. The remaining distribution is: 5%-range: 10.2%; 4%-range: 17.1%; 3%-range: 31.5%; and 20% below 3%. |
Thirty-year mortgage rates tend to be priced off 10-year Treasury yields, and we expect the latter to remain above 4.25% indefinitely mostly due to deteriorating fiscal fundaments (and lingering inflation risks). According to the Mortgage Bankers Association, mortgage spreads have recently been running around the 210-215 bps range but have occasionally touched a bit below 200 bps. This points to some potential mortgage rate relief from the current 6.43% level but remaining above the 6.00% mark. Bottom Line: Amid stable home prices and only minor interest rate relief, the growth in jobs and wages along with broader personal incomes is destined to be the main driver of housing affordability improvement. Currently, the employment picture is mixed (payrolls expanding moderately but household-surveyed employment contracting), suggesting the income channel isn’t going to provide a quick affordability fix either. But it should permit a continued climb in NAR’s Housing Affordability Index to at least median levels in the period ahead. |