Soaring Construction Costs Drop Housing Affordability to Lowest Level in a Decade

Supply-chain bottlenecks that put upward pressure on home prices along with rising interest rates contributed to housing affordability falling to a 10-year low.  The likelihood of higher interest rates in the months ahead (as the Federal Reserve moves to tighten interest rates) along with ongoing production challenges threaten to drive housing affordability even lower in 2022.

According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) released today, just 54.2% of new and existing homes sold between the beginning of October and end of December were affordable to families earning the U.S. median income of $79,900. This is down from the 56.6% of homes sold in the third quarter of 2021 and is the lowest affordability level recorded since the beginning of the revised series in the first quarter of 2012.

The HOI shows that the national median home price increased to a record $360,000 in the fourth quarter, up $5,000 from the third quarter and a whopping $40,000 from the first quarter. Meanwhile, average mortgage rates increased by 21 basis points in the fourth quarter to 3.16% from 2.95% in the third quarter. Currently, mortgage rates are running above 3.5%, and this higher trend will further affect affordability later this year.

Lansing-East Lansing, Mich. was the nation’s most affordable major housing market, defined as a metro with a population of at least 500,000. There, 90.6% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $79,100.

Meanwhile, Cumberland, Md.-W.Va. was rated the nation’s most affordable small market, with 94% of homes sold in the fourth quarter being affordable to families earning the median income of $60,800.

For the fifth straight quarter, Los Angeles-Long Beach-Glendale, Calif. remained the nation’s least affordable major housing market. There, just 7.5% of the homes sold during the fourth quarter were affordable to families earning the area’s median income of $80,000.

The top five least affordable small housing markets were also in the Golden State. At the very bottom of the affordability chart was Salinas, Calif., where 9.7% of all new and existing homes sold in the fourth quarter were affordable to families earning the area’s median income of $80,900.