Housing Affordability is a Big Challenge

Last month, I wrote about how population growth is one of the biggest drivers of the entire housing market, including new and existing homes. Why? Because population growth helps drive housing formations.

The majority of household formations occur when a group of young Millennials or Gen-Zers leave their parents’ basements and decide to room together, usually in connection with a new job or higher education opportunity, or a romantic relationship. This constitutes a “household formation” and this cohort makes up the largest percentage of new formations and are a key driver within in America’s total housing demand picture. 

But as this cohort attempts to segue into the home ownership market over time, driven by the “American Dream” of home ownership, we see that recent data indicates the end of the housing boom brought about by the COVID pandemic, due in large part because of affordability. This is keeping many in their rental housing for longer than they would care to. 

Priced Out. As I have mentioned many times in the past, the National Association of Home Builders (NAHB) collects reams of data on all aspects of new housing-related activities and publishes a variety of reports that deliver this data in many useful formats. 

One of those was the recently published 2023 Priced-Out Estimates, which shows that 96.5 million households are not able to afford a median priced new home, and that an additional 140,436 households would be priced out if the price goes up by $1,000. 

This post 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.

Based on this, the minimum income required to purchase a $150,000 home at the mortgage rate of 6.25% is $45,672.63. In 2023, about 39 million households in the United States are estimated to have incomes no more than that threshold and therefore can only afford to buy homes priced no more than $150,000. These 39 million households form the bottom step of the pyramid. 

Another 25.8 million can only afford to pay a top price of somewhere between $150,000 and $250,000 (the second step on the pyramid). Each step represents a maximum affordable price range for fewer and fewer households. Obviously, housing affordability is a greater concern for households with annual income at the lower end of the distribution.

The top step of the pyramid shows that around 3 million households can buy a home priced above $1.55 million. While this market is significant and important, market analysts should never only focus on them to the exclusion of the larger number of Americans with more modest incomes that support the pyramid’s base.

New Statistic. But despite the affordability challenge, other NAHB analysis of the most recent Quarterly Sales by Price and Financing published by the U.S. Census Bureau reveals a new statistic that was surprising: the number of all-cash sales has risen to levels not seen since 2007. 

The share of cash purchases has climbed each of the past three quarters to reach a 20-year high of 9.5% (14,000 sales), and this is the first time since 2007 that cash sales accounted for both a larger number as well as a larger share of the total. 

Although cash sales typically make up a small portion of new home sales, they constitute a larger share of existing home sales. According to estimates from the National Association of Realtors, 22% of existing home transactions were all-cash sales in September 2022, down from 24% in August and 23% in September 2021. 

We have witnessed these housing cycles many times in the past, and the full recovery of the quest for single family ownership will only come when interest rates come down.

The AVP Pulse Index for April ticked up slightly by +0.6%, maintaining the steady flattening that I observed a couple of months ago, and where we believe the index will remain for the foreseeable future. This increase reflects a healthy Construction Materials Industry and demonstrates the start of an uptick from the seasonally slower months in the winter. Interestingly, it is the housing market leading this upward trend with monthly increases of 9.8% in new housing starts and 2.0% in the NAHB/Wells Fargo Housing Market Index. Both housing starts and the NAHB/Wells Fargo Housing Market Index have returned to levels not seen since August and September, respectively.

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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