When and How Homes Will Become Affordable Again

How 100 people can look at the same sets of numbers and interpret them differently is utterly fascinating. These differing opinions make housing market predictions challenging. For example,

• CNBC says it could be up to two years before the average family can afford to buy a home.
• J.P. Morgan believes it could be up to 3.5 years, for those lucky enough to live in the right areas. That's because J.P. Morgan analysts believe affordability could take 5.3 years (or more) to be restored in large metro areas.
• Redfin predicts the U.S. market will enjoy a modest reduction in both interest rates and home prices this year, and that the number of listings will increase.

And so it goes. The answer to the question of when the average family can expect to buy an affordable home varies by source. And maybe they're all right. Perhaps people in one area of the country will enjoy lower prices before other regions do.

When it comes to making predictions, analysts rely heavily on the same data. While they tend to pinpoint different timeframes, they're all keeping their eye on the same signs.

What it's going to take

Housing prices hinge on these three metrics.

1. Income

While it may not feel like it, average incomes have been rising since 2019. However, in 2020, the income required to take out a new mortgage on a median-priced house was $49,680, according to CNBC. Today, it's somewhere between $107,000 and $114,627, depending on the source.

The fact is, the income required to qualify for a mortgage for a median-priced home has more than doubled in three years. If homes are to become more affordable, Americans are going to need higher wages.

2. Mortgage rates

In March, it will be two years since the Federal Reserve began to crank up the federal funds rate -- the rate at which banks loan money to each other overnight -- to slow inflation. While higher rates have worked to curb inflation, it's a slow process. Economists at Goldman Sachs predicted earlier this week that the Fed will likely begin to lower the federal funds rate in March and make a total of five cuts this year.

Five cuts in 2024 will certainly come as welcome news to potential homebuyers, but lower rates may not be as straightforward as they appear. As rates drop, buyers will swarm the market, and competition will once again heat up prices.

3. Home prices

Simply put, there are too few homes on the market for prices to drop in any meaningful way. Baby boomers dedicated to the idea of aging in place aren't putting their homes up for sale. And younger homeowners are unwilling to trade the historically low interest rates they snagged during the pandemic for a higher rate. It's a bit of a stalemate.

For home prices to drop, there needs to be competition among home sellers. Instead of one or two area homes for sale, there need to be many. The key to increasing inventory is building. While densely populated metro and urban areas may not have the room to put up more homes, land is plentiful in rural areas. Still, that doesn't mean that new houses are popping up.

To understand why the U.S. has such a shortage of new housing, we must look back to the housing crash of 2008. Many home builders closed up shop, and tradespeople found other work. Once things stabilized a few years later, plenty of people wanted to buy a new home, but too few were being built to satisfy the need.

The slump we see in building today is a remnant of The Great Recession, made worse by the pandemic and the number of young adults who want to buy a home of their own.

A balancing act

While it would be nice if wages continue to rise or interest rates drop, it won't be a single factor that makes homes more affordable. Like the game Jenga, it will be a balancing act, with each of these three factors working together.

Whether you're a homeowner ready to upgrade or a first-time home buyer, be on the lookout for rising incomes, slowly falling mortgage rates, and homes that hit the market with a slightly lower price tag.