The Housing Affordability Challenge

Last month, I wrote about a recent report issued by the National Association of Home Builders/Wells Fargo Housing Opportunity Index, also known as the “HOI,” which showed that just 54.2% 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 $79,900. 

This is down from the 56.6% of homes sold in the third quarter of 2020. But more startling, the HOI reveals this reading is the lowest affordability level recorded since the beginning of the revised series in the first quarter of 2012.

This is a troublesome trend as interest rates climbed back above 4% for the first time since 2019 in just the last month. Frankly, mortgage borrowers and homebuyers were like kids in a candy store, taking advantage of once-in-a-lifetime interest rates which the Fed pushed down to artificially low levels to help battle the economic fallout from the scourge of COVID. 

But now rates are returning to normal levels, and as has been the case half a dozen times in the past 40 years, these higher rates will act as a drag on runaway housing appreciation, and the momentum of value growth in new and existing houses will slow.

New HOI Info. Which brings me to the discussion of the HOI; since that last report issued just a few weeks ago, the National Association of Home Builders (NAHB) has followed up on the HOI study and brought further clarity to the runaway affordability conundrum, which further updates the data in the recent HOI. 

The NAHB released its 2022 “Priced-Out Estimates” showing that 87.5 million households are not able to afford a median priced new home, and that an additional 117,932 would be priced out if the price goes up by just $1,000. 

And yet a second report shows the impact of households priced out by higher interest rates. This study focuses on the related U.S. housing affordability “pyramid,” showing how many households have enough income to afford homes at various price thresholds. 

The pyramid uses the same standard underwriting criterion as the priced-out estimates to determine affordability: that the sum of mortgage payments, property taxes, homeowners and private mortgage insurance premiums should be no more than 28% of the household income.

Priced Out. Based on this, the minimum income required to purchase a $150,000 home is $36,074. In 2022, about 36 million households in the U.S. are estimated to have incomes at or below that threshold and, therefore, the maximum priced home they can afford is between $0 and $150,000. These 36 million households form the bottom step or base of the pyramid. Another 24.4 million can only afford to pay a top price of somewhere between $150,000 and $250,000, the second step on the pyramid, and so on up the pyramid. Each step represents a maximum affordable price range for fewer and fewer households.

The top step of the pyramid shows that 2.9 million households can buy a home priced above $1.55 million. But the report points out these comparatively wealthy Americans and the high-end homes they can afford make for interesting metrics to measure, but they represent only 2.3% of all households in America. It is the remaining 97.6% of Americans with more modest incomes that support the pyramid’s base.

The hottest housing markets in the United States have seen price appreciation in excess of 30% in 2021, an amazing statistic in a single year, driven by the ultra-low interest rates that are now gone forever. 

As rates climb, pricing strength will be reined in, and both existing home sellers and new home builders will face the stark reality that affordability is critical to moving houses. And we all know that the housing market, and new home construction in particular, is a key consumer of construction aggregates; maintaining healthy levels of home sales is important to our industry. 

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.

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