Housing affordability hits record lows

Homeownership is becoming more difficult for many Americans as affordability declines to its lowest levels in years. That as the U.S. housing market continues to struggle with a supply and demand imbalance, driven by rising costs, limited inventory and higher mortgage rates (although, historically speaking, they are still low). This imbalance is making it harder for prospective buyers to enter the housing market.

"Home affordability is, according to the National Association of Realtors, trending at a record low level," said Christopher Maloney, mortgage strategist at BOK Financial Capital Markets. "The last time this country saw home affordability almost (but not quite) as low was prior to the beginning of the Great Financial Crisis."

The root of the crisis
A key issue is supply: single-family home construction has not kept pace with U.S. population growth. "There are a number of reasons for the desperate shortage of single-family homes Americans suffer from today," Maloney continues. "Whatever the reasons may be, home builders are not building at near the pace they used to."

Even during periods of ultra-low interest rates, builders did not ramp up production enough to close the housing gap. "Today's 'too-high' interest rates aren't the problem," Maloney suggests, pointing to years when rates were at historic lows but home construction remained slow. The result has been a double-digit percentage increase in median home sale prices this decade, making it more difficult for first-time and lower-income buyers to enter the market.

Adding to the problem, leading home builders are focusing on higher-margin properties rather than entry-level housing. DR Horton, the country’s largest home builder spent significant time discussing share repurchases in its latest earnings call. According to Maloney, the company’s repeated mentions of 'repurchases' signal a stronger commitment to stock buybacks despite the dearth of affordable housing. "Over the past 12 months, we returned essentially all of the cash we generated to shareholders through repurchases and dividends," the company stated. This is even as the company acknowledged that demographics support strong housing demand, and the supply of affordable homes remains tight.

The Federal Reserve's approach to monitoring home prices has also contributed to discrepancies in affordability data. "The Bureau of Labor Statistics considers housing an 'investment' good rather than a 'consumption' item, so it measures home price changes within CPI (consumer price index) in a kind-of, sort-of manner referred to as 'owner's equivalent rent,'" Maloney explains. Consequently, actual home prices often outpace inflation measures, further complicating affordability assessments, he said.

What the industry is doing
Despite these challenges, some policy measures and market trends offer potential relief. "As home prices have surged in recent years, there has been mounting pressure on policymakers to expand affordable housing options," said Tanya Bates, regional home loans director for BOK Financial®. "This might include easing zoning laws, streamlining regulations and increasing funding for down payment assistance programs."

Lower interest rates in the future could also provide some relief. "If inflation stabilizes and economic conditions allow, the Fed may continue lowering the Federal Funds rate, potentially lowering mortgage rates in 2025," Bates explains. These lower rates could make home buying slightly more affordable compared to the past few years.

Meanwhile, the mortgage market is also adapting. If interest rates stabilize, alternative loan products may gain traction. "Adjustable-rate mortgages (ARMs) might be an attractive option for borrowers who want lower initial payments," Bates said. "ARMs typically offer lower interest rates for an initial fixed period before adjusting periodically based on a benchmark index."

At the same time, rising home insurance costs are adding to affordability concerns. "Factors such as inflation, increased construction costs and the frequency of natural disasters are driving these costs up," Bates said. "As a result, it becomes more expensive for insurance companies to cover potential losses, leading to higher premiums for homeowners."

The road ahead
The affordability crisis is not a short-term issue. Without major industry changes, homeownership will remain elusive for a growing segment of Americans. While some industry shifts—such as policy incentives and flexible mortgage products—may help in the near term, it remains unclear if they will make a dent in the underlying supply shortage. Without any major shifts, experts say we should expect housing affordability challenges to persist for now.