The American Dream on Hold: What It Would Really Take to Make Homes

The "American dream" of owning a house is under grave danger, and it will require a significant change in the economy for most families to be able to afford it again.

Housing Affordability Challenges

In particular, home prices would need to drop by 40%, the average mortgage rate would need to fall to an unprecedented 2.45% from its December 2023 average of 6.80%, or the median household income would need to soar to $129,096 from its December level of $77,730 in order to make houses as affordable as they were in February 2020 on typical incomes. By the estimates of Investopedia, a combination of those three criteria would also work.

These numbers demonstrate how much housing affordability has increased since the pandemic struck, making it unaffordable for most families. A pair of factors have impacted first-time buyers: rising prices since 2020 and mortgage rates that are at or near record highs since 2022. These factors have made monthly mortgage payments on normally priced homes unaffordable for all but the wealthiest buyers.

As of December, the Federal Reserve Bank of Atlanta's measure of housing affordability, which ranges from 100 to 72.8, was almost at its lowest position ever recorded in records dating back to 2006. A home is considered affordable at a normal salary when it reaches this level. In contrast, prior to the pandemic causing extreme fluctuations in the index's most important components-prices, incomes, and mortgage rates-the index was at 106.7 in February 2020.

Persistent Housing Affordability Crisis

According to the tracker, as of December 2023, the monthly mortgage payment, which includes taxes and insurance, for a median-priced property was $2,670, or 41.2% of the monthly income of a typical household. This implies that, at current rates, you would require a six-figure salary in order for your mortgage to represent less than 30% of your income, which is the typical cutoff point for a housing payment that is reasonable.

Housing specialists argue that there's little chance that the situation will improve very soon. Lower mortgage rates might encourage more demand for homes, which would raise prices even further, even if mortgage rates are predicted to decline over the course of the next year as the Federal Reserve gets ready to scale back its campaign of anti-inflation interest rate rises and drop the fed funds rate.

According to Lawrence Yun, chief economist of the National Association of Realtors, building more homes is the only practical option. Since the Great Recession, the United States has been creating fewer homes than are necessary, which is the root cause of many of the housing market's problems. As of 2021, the United States has 5.5 million fewer houses than it needs, per an association report.