U.S. housing affordability is worse than the peak of the 2006 housing bubble

After a modest improvement in 2023, America’s housing affordability crisis is seemingly getting worse with each passing month.

Using data from the Atlanta Federal Reserve Bank, macro strategist Charlie Bilello showed that the typical American household would need to spend 43.8% of their income to afford an average home in today’s market.

While it’s lower than the peak of 45.3% in 2022, it’s a notable rise from one year ago when average housing payments represented 40.4% of income.

For another comparison, housing payments as a percentage of average income peaked at 42% in 2006. This was during the housing bubble that preceded the 2008 financial crisis.

Before the pandemic, the typical household would need to spend roughly 30% of their income to afford a home.

Average housing payments include mortgage costs, taxes, insurance, and private mortgage insurance on down payments of less than 20%.

“U.S. housing affordability is worse today than the peak of the last housing bubble,” said Bilello.

“[I]f you don’t have money saved for a big down payment, housing remains unaffordable for many,” he explained.

Rising home prices, still-elevated mortgage rates, and only modest gains in inflation-adjusted incomes have made it harder for Americans to climb the homeownership ladder.

Unfortunately, economists expect these conditions to persist for much longer.

Housing affordability woes

For many would-be homebuyers, the final nail in the coffin was the Fed’s aggressive rate-hike cycle, which began in March 2022.

According to Freddie Mac data, by the time the Fed finished raising interest rates, the average 30-year mortgage rate had peaked closer to 8%.

Mortgage rates are now in free fall, but they’re still unaffordable for most buyers. Economists say rates need to fall to around 5% for average buyers to seriously consider house-hunting again.

A 5% mortgage rate is also the “magic number” that would encourage more homeowners to list their properties and alleviate the supply shortage.

The average 30-year rate is currently 6.2%. According to various estimates from the NAR, Realtor.com, and Wells Fargo, rates aren’t expected to fall to the low 5% range for at least another year.

Current mortgage rates and home prices “present a clear challenge for homebuyers,” said ATTOM CEO Rob Barber.

Trends this year “are particularly challenging for house hunters, more so than at any point since the housing market boom began in 2012,” Barber explained.

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