Affordability = Earnings + Home Prices + Mortgage Rates + Size
What is new:
- Earnings are rising (adjusted for inflation).
- Home prices are declining.
- Mortgage rates are down.
- Single-family square footage is smaller.
That is a winning formula for an improving housing market in 2024.
Going Deeper:
- Trends in both income and home prices have started to counteract the affordability challenges that have plagued the residential construction market since the middle of last year. The average price of homes that have actually sold is down 10.9% from this time last year.
- We knew the size of homes had to come down to increase affordability, and that is the trend. Size is down 2.1% year-over-year.
- Inflation adjusted earnings are up 1.2% year-over-year, which means more buying power.
- The green shoots in the market that ITR Economics CEO and Chief Economist Brian Beaulieu pointed out in April are still green.
In October 2022, the average mortgage payment on a median-priced new home – assuming a 15% down payment and financing at then-current rates – was $2,864, or 56.9% of monthly earnings for someone with annual earnings at the then median level.
As of March, that mortgage payment declined 17.7% to $2,357; coming in at 49.3% of monthly earnings for the median wage earner.
Caveats and Risks
October’s 56.9% was a 38-year high for the US Average Monthly Mortgage Payment as a Percentage of Median Monthly Earnings, and March’s figure is still high relative to historical norms, as can be seen in the chart. However, the trend is moving in the right direction.