The National Association of Home Builders (NAHB) has released their 2022 “Priced-Out” estimates. What it shows is that an increasingly high number of households are priced out of the housing market and current trends are making that worse.
According to the report, the median home now costs $412,505. If that price goes up by only $1000, that would price 117,932 households out of the market. * The report also estimates that a quarter-point increase (which the Fed just announced) would price approximately 1.1 million households out of the market.
In the last two-plus years of the pandemic, we saw prices for many things move up and for some things down like a roller coaster. The big surprise was that the demand for homes increased dramatically. Low inventory along with low interest rates combined to push prices higher.
Housing affordability has been an issue for quite a long time. The financial bubble in 2007 blew up partially because home values became over inflated and speculation drove prices. For years afterward, there was a surplus of homes in many areas. Entire home developments were scrapped midstream, and some were actually torn down in the hottest markets.
Since 2008 the demand has been tepid, and builders remained cautious not wanting to replay 2007. This lack of incentive created a deficit of new inventory over time.
When the pandemic hit, many people spent much more time at home due to lockdowns and eventually, work-from-home became normalized. As home buyers discovered new flexibility to move away from the office and to look for larger homes with dedicated offices, demand significantly increased while inventory remained low.
The supply chain problems led to slowdowns in completing new developments and increased prices. Wall Street investors started getting in on the booming prices by purchasing private homes to lease or flip, further pushing prices higher.
NAHB estimates that about 31% of US households could afford to buy a median ($412,505) home this year. A $1000 increase in that median price would make 117,932 households unable to afford that home.
Of course, the states varied considerably in affordability.
Among all the states, California registered the largest number of households priced out of the market by a $1,000 increase in the median-priced home in the state (12,411), followed by Texas (11,108), and Florida (6,931), largely because these three states are the top three populous states. Households in California, where half of all new homes are sold for less than $543,767, need an annual income of at least $120,445 to qualify for a new home mortgage. Therefore, around 9.2 million households (68.9% of all households) in California do not earn enough income to qualify for new home loan initially. *
Affordability is calculated by adding mortgage payments, property taxes, HOA and private mortgage insurance premiums so that the total represents less than 28% of household income.
All of this may point to a challenging year for home builders. Higher material and labor costs have already pushed contractors to raise prices, although not at the pace of cost increases. So far, demand is high and inventory is low, so new home builders and remodeling contractors will stay busy. Still, with six more interest rate hikes anticipated by Fed Watchers, affordability will continue to price more and more households out of the market.