Higher mortgage rates, rising construction costs and economic uncertainty pressured housing affordability to reverse course in Q2, after showing improvement in the prior three quarters, according to the latest data from the National Association of Home Builders (NAHB).
The NAHB/Wells Fargo Cost of Housing Index (CHI) for Q2 found that a family earning the nation’s median income of $106,800 needed 34% of its income to cover the mortgage payment on a median-priced new home, up from 32% in Q1. Low-income families (those earning only 50% of median income) would have to spend 67% of their earnings to pay for the same new home, up from 65% in Q1. For existing homes, the numbers are even higher: typical families would have to pay 36% of their income (up from 32% in Q1), and low-income families would have to pay 71% (up from 65% in Q1).
For reference, the Department of Housing and Urban Development defines cost-burdened families as those “who pay more than 30% of their income for housing,” and a severe cost burden is defined as paying more than 50% of one’s income on housing.
NAHB Chairman Bill Owens said that the weakened figures in Q2 were due to several factors: “Buyers faced high mortgage rates and economic uncertainty, while builders dealt with rising construction costs, unnecessary regulatory burdens and labor shortages.”
NAHB Chief Economist Robert Dietz added that a “nationwide housing shortage of roughly 1.2 million units continues to strain affordability.”
The report also noted that the affordability downturn was due primarily to a sharp increase in median home prices from Q1 to Q2.
Looking at metro data, the typical family was “severely cost-burdened” in eight out of 175 markets in Q2, and “cost-burdened” in 77 markets. There are 90 markets where the CHI is 30% of earnings or lower.
The most cost-burdened market was San Jose, California, where 82% of a typical family’s income is needed to make a mortgage payment on an existing home. This was followed by: San Francisco, California (71%); Urban Honolulu, Hawaii (70%); San Diego, California (68%); and Naples, Florida (60%). Low-income families in these five markets would have to pay between 121% and 164% of their income to cover a mortgage.
According to the report, there are still markets where housing is affordable—with the number one being Decatur, Illinois, where typical families needed to spend just 16% of their income to pay for a mortgage on an existing home. Rounding out the least burdened markets are: Elmira, New York (17%); Peoria, Illinois (18%); Springfield, Illinois (20%); and Davenport, Iowa (20%). Low-income families in these markets would have to pay between 31% and 39% of their income to cover a mortgage.
Looking ahead, Dietz said that policymakers in the government need to “remove regulatory barriers, reduce economic uncertainty and support a stronger business climate so builders can produce the homes and apartments the nation urgently needs.”
Owens added that the “recently enacted 21st Century ROAD to Housing Act will help address many of these challenges,” but noted that “implementation will take time.”
