This story is the second in a four-part series. Read part one here.
U.S. house prices are out of reach for millions of Americans, and the Federal Reserve’s pause in interest rate cuts means that financing costs will likely dog the real estate market for months to come.
Affordability metrics show housing costs squeezing household finances, pressures made more intense by a long-term shortage of lost-cost housing.
Affordability in general was a top issue in the 2024 election, with dueling strategies coming from Democrats and Republicans about how to deal with it. Concerns about the staying power of inflation and uncertainties about the Trump administration’s macroeconomic policies suggest the issue — particularly in the housing market — could persist for the foreseeable future.
The median price of a new single-family home in the U.S. is about $460,000, according to the National Association of Home Builders (NAHB), a trade group for residential construction companies. Based on mortgage rates at 6.5 percent and current underwriting standards from banks, that price is out of range for about three-quarters of all U.S. households, the NAHB found in March.
Mortgage rates are currently above that level at 6.65 percent for the most popular 30-year mortgage.
Even houses that cost $300,000, which is substantially less than the median sales price of $398,000 for existing homes in February, are too expensive for 57 percent of households, the NAHB found.
The National Association of Realtors’ (NAR) housing affordability index, as reported by the Department of Housing and Urban Development, is well-below the 30-year trend line.
Households with a median income of about $80,0000 are just able to afford a mortgage for the median-priced home. That number popped up to a break-even at the end of last year after falling into negative territory in the back half of 2024.
Between 2010 and 2023, U.S. households with median income were easily able to afford the median-priced home, even in the immediate aftermath of the pandemic. Affordability more than doubled the break-even level in 2014 and hit a recent peak at the end of 2021 before sliding into tighter territory as interest rates rose.
While both rental and homeownership affordability has declined over the last few years, the drop for aspiring homeowners has been more pronounced. NAR’s homeownership affordability index has fallen about 80 points, or about 44 percent since 2020.
While the situation has been more stable for renters, it’s not stable at a comfortable level. About half of all renters in the U.S. spend more than 30 percent of their monthly income on rent, a threshold reached in 2022 that hadn’t been seen in 25-years of data tracking by ratings agency Moody’s.
In the short term, pressures on housing prices are being kept up by the pause in interest rate cuts from the Fed.
After jacking the effective interbank lending rate up to the highest level since 2001 following the pandemic inflation, the U.S. central bank started to cut rates through the end of last year but held off during its January and March meetings after inflation ticked up and uncertainties swirled around the Trump administration’s plan for tariffs.
Fed Chair Jerome Powell said in March that Trump’s tariffs may lead to a delay in the abatement of inflation
“Inflation has started to move up now, we think partly in response to tariffs and there may be a delay in further progress over the course of this year,” he said.
That will likely mean a slower pace for additional rate cuts, which would allow mortgage rates to come down, easing housing costs in turn. Mortgage rates move more closely in step with longer term interest rates in the bond market but are undergirded by interbank lending rates in the short term.
However, in the longer term, housing costs are being kept aloft not by financial conditions but by a physical shortage of affordable houses.
“Depending on how you measure it, the shortage is anywhere from 1.5 million to 5 or 6 million,” Daniel McCue, senior research associate at Harvard’s Joint Center for Housing Studies, told The Hill. “The fact is that vacancy rates remain low nationwide.”
The housing supply shortage has been a well documented phenomenon over the past few years. Why residential home builders haven’t been rushing in to meet this demand remains something of an open question, though Harvard’s McCue said he has seen construction refocus toward lower-income consumers.
“Existing home sales hit their lowest point since the 1990s last year, but new single-family home sales went up modestly. What’s interesting is that prices of new homes went down, so they were able to cut costs and produce a different product to hit a lower price point to help sales,” he said.
There are likely other factors keeping the shortage in place, including the fact that house builders can often get higher profit margins for premium houses than for lower-priced units and the behavior of investors who buy up large swaths of property.
“One factor that exacerbates the shortage is the activity of institutional investors, who buy up housing inventory to flip or rent out for profit. Large investors purchased 14.8 percent of homes on the market in the first quarter of 2024 — a record-high percentage,” analysts for Bankrate wrote in March.
The NAHB has pointed a finger at permitting restrictions. Arguing in front of lawmakers on the Senate Environment and Public Works Committee earlier this year, NAHB Chair Carl Harris said that “most land developers have been forced to step away from particular parcels of land due to the uncertainty of being able to obtain the necessary permits.”
Tenant organizers and low-income housing advocates disagree.
“Deregulation is not a strategy to reduce rents, and definitely not in the short term,” Tara Raghuveer, director of the Tenant Union Federation, told The Hill. “Even if housing gets built, which would take time, the eternal question is for whom and at what price?”
