The Untold Story Of Affordability

What comes to mind when you hear the words "affordability"? The cost of gasoline? Grocery prices? Insurance premiums? Those household costs are the grist for a deluge of political campaign ads. But the price tag that has most Americans squawking is housing.  

Data from the Department of Labor reveals that housing prices have soared approximately 56% since 2020, while general inflation has spiked by about 29% during the same period.  Housing (shelter)  makes up the largest share of the Consumer Price Index (CPI)--about 36%.   

In other words, home prices have increased at almost twice the rate of inflation over the last six years. Overall inflationary trends cannot solely explain why today's home prices have hit the ceiling fan, pardon the word choice.

The current median price of a new home in the U.S. is $425,786, according to the National Association of Home Builders (NAHB). Existing median home prices are $434,800.  About 88.2 million households (or 65%) are unable to afford a median priced home at today's interest rates.

Those national averages may not apply to your market.  There are wide gaps between cities. Here are some comparisons between metro areas of median home sale (not the listed price) sales:

• San Jose, California:  $1.528 million
• Seattle, Washington: $814,757
• New York City: $735,000
• Boston, Massachusetts $710,000
• Birmingham, Alabama: $293,500
• San Antonio, Texas: $285,000
• Memphis, Tennessee: $271,000
• Louisville, Kentucky: $270,000
• St. Louis, Missouri: $262,750
• Cleveland, Ohio: $220,000

A leading national benchmark for residential real estate values--the Case-Shiller Home Index Price--calculated that single home prices skyrocketed 87% between December, 2015, through December, 2025.That is good news for existing homeowners, but impacts the affordability for potential buyers.  

Interest rates act as an overhang on housing affordability.  When the Federal Reserve began aggressively raising rates to quell inflation, the move triggered an increase in mortgage rates. Typically, mortgage rates move nearly in tandem with the 10-year Treasury rate.

The Treasury rate rises when the Fed hikes rates because it reflects an average of where investors expect short term rates to be over the next decade. Today, a 30-year fixed rate mortgage lugs a 7.2% interest rate. In January, 2021, the rate was 2.65%.  The pre-pandemic average was 3.41%.  

To demonstrate the impact, consider that when interest rates increased from 6.5% to 6.75%. It effectively priced out of the market around 1.3 million households. These households are unable to meet the higher income threshold required to afford the increased monthly payments.

Mortgage rates also negatively impact home buying because many households are sitting on ultra-low COVID era rates.  About 78% of Americans with outstanding 30-year mortgages have interest rates below 6%.  More than half (51%) are holding fixed rates pegged at 3.99% or below.

These homeowners are understandably reluctant to sell their residence and move even if they can afford a higher monthly payment.  Elevated home prices and hefty mortgage rates are a double whammy for first time buyers. They face the largest affordability gap, 

That explains why the average age of first-time homebuyers has leapfrogged to a record high of 40-years old, according to National Association of Realtors research. The average age has climbed from 32-years old only a decade ago. 

Consider 70% of households can only afford housing priced from $100,000 to $300,000, according to the NAHB data.  The average buyer would need household income of $147,433 to qualify for a mortgage for a median-priced home.  The annual median household income is $87,460 today.

That chasm between home price and income is what is frustrating young home buyers. 

Traditionally, starter homes for first-time buyers are newly built residences.  Housing starts for single family residences have dipped from 1.127 million nationally in 2021 to 940,000 in 2025. New home supply usually translates into more negotiating leverage for buyers of new and existing residences.

Projects with single-family home priced at $300,000 or below accounted for just 14.2% of the total in May, according to research on housing trends.  This was down significantly from 27.3% in May of 2019 when homes in this price range represented the second-largest portion of the new home market.

Median down payments have accelerated as buyers spend more money up front to lower their monthly payments in today's breakneck interest rate environment. In August, the median down payment was $27,166, which represents a jump of $4,000 from January.  

Input prices are also driving up costs for new homes.  Since the pandemic, costs for materials such as power transformers (72%), steel-mill products (77%), gypsum building materials (48%), brick and structural tile (29%) and ready mix concrete (33%) have forced builders to boost prices.

Material costs aren't the only issue influencing home prices.  Wage growth for residential construction trades jumped after COVID. National averages for heavy equipment operators have reached  $44.20 per hour; electricians $40; roofers $28.40; and construction laborers $24.80.   

Competition these workers are increasing as more factories and data centers are building built in the country.  The lack of experienced tradespeople is prompting calls for the opening of more training centers to encourage young people to qualify for these jobs.

Housing affordability matters not only to buyers; it impacts the nation's economy. Housing spending and investment accounts for 15% to 18% of Gross Domestic Product (GDP), a measurement of economic activity.  Home equity represents a major source of household wealth, accounting for 45%.

Every homebuyer wants to know the answer to this question: When will home prices ever come down?

The outlook for relief soon is cloudy at best.  Although household income is climbing, interest rates are the number one stumbling block to homebuyers. Robust interest rates translate into higher monthly mortgage payments reducing affordability, while suppressing new home starts. 

The Federal Reserve, which has tinkered with rates for six years, has yet to reach its target inflation rate of 2%.  Inflation was last exactly 2.0% in April, 2019.  The Fed has a mandate to tame inflation, but the downside of ever increasing rates is the suffocation of the home market.  

One suggestion worth considering is to make home mortgage rates portable.  Homeowners could buy a new or existing residence and retain their current interest rate.  Lenders would likely choke on the idea, but the current strategy is not healthy for the economy.  New ideas are needed to turn the tide.

Deceptive Political Appeal Of Affordability

After the highest inflation in 44-years under President Biden, specious Democrats are championing affordability. They are blasting President Trump for the lofty prices of housing, groceries, child care and insurance. Democrats are apoplectic that Trump hasn't lowered prices during his 11 months in office.

Democrats have a case of convenient amnesia.  During the period 2021-2024, prices ballooned a cumulative 19.5%, the worst runaway inflation since the 48.6% sticker shock during Jimmy Carter's term from 1977-1980. 

Democrats remained indifferent about mushrooming prices while they were in power.  Now the party has experienced an epiphany. Flip went flop and now they are concerned about the impact of galloping inflation on the financial health of Americans.

Cheeky Democrat political strategists thumped their chests and proclaimed elections in New Jersey, Virginia and New York City birthed a winning issue: "affordability," guaranteed to rouse voter anger and stoke turnout.  However, New Jersey and Virginia were centered on other issues.

Affordability was only front-and-center in New York, where the cost of living is more than double the national average.  Socialist Zohran Mamdani swept the Big Apple's mayoral race, promising to lower costs and make life easier for New Yorkers.That hardly suggests a Democrat midterm tsunami. 

However, there's no question Americans are weary of bearing the brunt of a never-ending march of higher prices.  You can't blame them. Inflation was 1.4% when Trump left office at the end of 2020.  In Biden's first year in 2021, prices rocketed 7% higher, the largest one-year inflation rate since 1981.

Here is a sample of the cumulative cost increases as measured by the Consumer Price Index (CPI) during the chaotic Biden years: 

• Transportation saw the largest increase, hiking 34.4%.  Gasoline prices were a key driver.
• Housing leapt by 23%.  Prices for rent soared 31%.
• Food and beverage prices rose 23.6%. Groceries skyrocketed 26%.
• Fuels and utilities catapulted 28.5%.  
• Since 2017, childcare costs have spiked 40% for a family with two children. 

While acknowledging COVID impacted inflation, the federal government spent a whopping $27.4 trillion in the fiscal years 2021 through 2024 as Democrats embarked on a spending spree unseen in modern times.The pump-priming flooded the economy with too much money chasing scare goods.   

The rampant spending included infrastructure projects and cash payments as part of the $1.9 trillion American Rescue Plan.  All that money sloshing around in the economy created jobs, but the numbers were inflated by the addition of 1.07 million government jobs in the Biden years.  

The reckless spending helped fuel a wage-price spiral that poured gasoline on services and goods igniting combustible inflation. 

The Federal Reserve was forced to act to hose down inflation, ratcheting up interest rates from near zero in 2020 to 5.5% in January, 2024.  Rising rates hit consumer's in digital wallets, as interest surged on credit cards, cars and housing mortgages. Americans hemorrhaged cash to make interest payments.

The interest rate bomb and exploding prices left about two-thirds of American households living paycheck-to-paycheck.  

The latest survey conducted by the University of Michigan underscores the economic migraine. The index plummeted to 50.3%, documenting flagging consumer sentiment.  A reading below 75 suggests consumer pessimism about the economy and personal finances.  Consumers are gasping for hope.  

All the hyper-political rhetoric will do nothing to return prices to 2019 levels. Prices will continue to rise, but are showing signs of increasing at a slower rate.  In the aftermath of the worst inflation under President Carter, prices stabilized but there was no retreat to pre-1977 levels.    

Some economic models show when inflation exceeds 8% it can take an average of 16 years to return to the Fed's official 2% target. Other economists hedge, saying it can take a few years or up to a decade. That explains why Democrats are pivoting to  "affordability" as the midterm slogan de jour.  

Consumers are unlikely to care about past economic policy, which is the reason Republicans need to be laser-focused on the economy.  Renewing current tax cuts approved during Trump's first term, while representing progress, doesn't put more money today in the pockets of consumers. 

Other Trump tax cuts--the no tax on tips and no taxes on overtime for some workers--will not be felt by consumers until 2026 when they file taxes for 2025. Americans will have more dollars to spend as a result of these policy changes.

However, most consumers gauge affordability by how much they shell out when they buy groceries, dine out, put gas in their vehicles, pay for rent, housing and utilities.  Since Trump assumed office, prices have declined for gasoline, fresh fruits, eggs and communications services.

Yet other prices--for example, those for electricity, health insurance, beef and rent--have marched higher than 2%. In recognition of consumers' economic pain, the Trump Administration announced this month it will eliminate tariffs on coffee, beef, bananas, other fruits and vegetables. 

While it's a positive development,  Republicans need to level with Americans about inflation. Prices aren't going to fall as fast as costs surged.  Trump should be laster focused on growing the economy and jobs, while reminding Americans that it was Democrats who drove the inflation bus off the cliff.