The Root Cause of the Housing Affordability Crisis

2025 Housing Market: Battle of the Haves and the Have Nots

When did housing morph from American Dream to American Luxury? The fundamental need for housing, whether renting or owning, has become unaffordable. This issue has spread across the country; high housing costs are no longer confined to places like Los Angeles or New York City. The term, affordable housing, is an oxymoron. Perhaps it’s better to define it by what it is not, unaffordable.

From a loan originators perspective, we quantify an affordable housing through two figures, 28 & 36 percent, known in the business as front-end and back-end ratios. These numbers signify max allowances for your monthly housing and total debt respective to your gross monthly earnings. Studies show that these ratios provide long term success in the repayment of the loan. Keeping your budget within those limitations is a greater challenge today. Higher debt service ratios are the number one reason for a mortgage decline today.

However, the U.S. Department of Housing and Urban Development defines “affordable housing” as a household where the occupant is paying no more than 30% of the gross income on housing, including utilities. It's a comparable number to the front-end ratio of DTI but in a rent equivalent. By limiting the housing expense to 30% it allows the occupant the ability to afford other expenses, food, transportation, and live to spend another day. If you are spending more than 30% your income on housing, you could be tipping the scales of affordability.

The problem with the HUD definition is that all real estate is local. Housing costs vary by geography and where you lives dictate your earning potential. Therefore, the definition what makes housing affordable has a lot of grey area. Limiting 30% of your top line income to housing could be too lofty of a goal. That budget may require roommates, and a few of them. While some may want to give up hope, others want to understand the root cause of the affordability crisis. Clearly, it's easy to shake a finger at it, but today, but this blog looks to put a finger on it. Here are five fundamentals of the housing affordability crisis and how to nip it in the bud!

SUPPLY

Last week the Case-Shiller 20-City Home Price Index rose 4.5% year-over-year. That figure was below expectation, indicating slightly cooler prices. Limited housing stock continues to support price growth as home prices remain elevated across the US. The frenzy of the pandemic has passed, but home prices remain high not because of higher demand but because of limited supply. Resale inventory rests under 4 months supply while new home inventory is about 9 months. Home building is still extremely profitable, just not as profitable during the pandemic. Home builders are still moving inventory through interest rate buydowns and other incentives that have limited the inventory to 500,000 units which is flat over the last six months. Even with a surge in new-home construction, many economists declare the U.S. housing market is at a deficit of 4 million homes. Short supply is one of the biggest challenges impacting affordability. Resale inventory is rising back pre-pandemic levels but with nearly half of all mortgages outstanding are locked in at rates below 3.5%, many of those potential sellers could not qualify to make a lateral move, even if they wanted.

The number of new homes built plummeted since the great financial crisis, the aftermath of Dodd-Frank, and the imposed limitations on the financial sector. The mortgage industry is more concentrated, and the home loan programs are limited, reducing opportunity for creative financing. Further, zoning and land-use regulations have also increased steadily since the mid-20th century. Additionally, the “Not In My Back Yard” cohort is complicating the process for increasing the housing supply.

So, if there is low supply, let's just increase the supply. Make builders build more homes, and problem solved. Last year home completions reached the highest levels in nearly two decades, finally surpassing the rate of new household formations for the first time since 2016. Housing is still feeling the impacts of the great recession when home building was limited for years. Production costs have increased for builders, likewise, forcing construction of new communities into chunk pricing models. This means less detached homes and more townhomes and properties with attached walls to control costs. If the deficit of 4 million homes is true, this is a problem that could take decades.

PRICES

I was told trees don’t grow to the sky. Do home prices?

The high prices of homes today is a widely acknowledged factor. Over the past 50 years, home prices have risen significantly, so it's reasonable to expect this trend to continue, right? Like any asset, home prices are influenced by economic conditions that can either depress or boost their value. The 2020s are set to experience the most substantial increase in home prices seen in five decades. In the 1970s, home prices rose by 43%, which pales in comparison to the 1980s when growth remained under 10%. Still higher prices persisted through the 1990s and peaked during the Great Financial Crisis, following the largest decline in home prices since the Great Depression. Even in the strongest housing markets, prices dropped by low double digits. In some of the hardest-hit areas, such as Phoenix, home prices fell by nearly 50%.

Since 2020, home prices in Phoenix have risen by over 50%, making it challenging to determine is 2025 will be anything other than a seller’s market. Buying a home is a choice, and if the financials don't add up, renting is always an alternative. Purchasing at current market prices isn't affordable when you combine the prices with interest rates between 6 to 7 percent. From the sellers' perspective, considering all those 3.5% fixed-rate mortgages, can you blame them? Approximately 40% of homes in the USA are mortgage-free, creating less urgency to sell. Increasing your income by 10% per year is very difficult, yet unfortunately, that is the pace of home price increases in many markets.

In 1964 the average home price was $18,925, while the median income stood at $6,569. From the mid 60’s to 2022, home prices increased at twice the rate of wages, according to U.S. Census data. Escalating home prices are keeping rentals from being the affordable alternative. By renting for less than it costs to own, one can hopefully save the difference, thus increasing the potential down payment when an opportunity arises.

Justifying the current cost of housing, modern homes are significantly more advanced than those from 75 years ago. Features such as plumbing, central air conditioning, LED lighting, and construction materials are more expensive than in the past. These amenities are present in 90% of homes, and Americans are willing to pay more for them. They offer a higher quality of life and more property making it more attractive than urban living. In the 1950s, 64% of Americans lived in urban areas, whereas today, that figure exceeds 80%.

INCOME

The main issue with the wait-and-rent strategy is the expense of renting. Even though nominal incomes have increased, living costs can consume 50% or more of a household’s income. This is largely due to expenses beyond housing. Healthcare, education, and a consumer culture that values convenience and immediacy over savings, thus, put more pressure on wages.

The positive aspect is that income has increased, but the downside is that it hasn't risen sufficiently. According to the same 2022 Census study, the median household income reached $74,580, which is over ten times higher than in 1964. However, home prices have grown to $432,950, which is 20 times the 1964 amounts.

Income to home prices in 1964 = 34%

Income to home prices in 2020 - 17%.

The Area Median Income (AMI) represents the median point in the income distribution of a particular area and is determined annually by the Department of Housing and Urban Development (HUD). This means that half of the area's earners have incomes below this number, while the other half have incomes above it. The AMI varies by region and serves as a barometer for determining eligibility for affordable housing. Housing prices are not the lone culprit, taxes, insurance costs, and maintenance has also risen dramatically in the past 5 years.

What income level is necessary to buy in this market? According to the New York Post, the median home price for April 2025 is $431,250. To qualify, an annual income of $114,000 is needed, assuming a 20% down payment and a 30% front-end ratio. If you can't raise your down payment or lower your purchase price, you'll need to boost your income.

Look closer and a stark divergence of income to home price began in 2000. From 2000 to 2008, housing prices rose by 4.2 percent each year, and from 2008 to 2023, they increased by 4.4 percent annually. Meanwhile, median family income grew at a much slower pace: 2.5 percent annually from 2000 to 2008, and 3.4 percent from 2008 to 2023.

Divergence in the Force: Housing prices started to separate from incomes in the early 2000s.

INTEREST RATES

High Times: Boomers are quick to remind everyone that when they purchased their first home mortgage rates were double digits.

Last year the 30-year fixed rate averaged 6.72%. Boomers are happy to remind everyone that when they purchased their first home in 1982 rates were 14%. Millennials will tell you that anything over 5% is highway robbery. Both viewpoints have merit but it’s important to consider “normal” interest rates before the 1970s. Back to the Great Depression, rates averaged between 4-6% with some periods going below 3%. The average annual mortgage rate over the past 95 years is 6.71%.

Considering historical data, it is reasonable to conclude that today's interest rates are fairly priced. In recent years, mortgage rates breached 8% but only for a very short period. What are the odds that rates will increase further, given that inflation poses a significant threat? Certainly, that is a possibility, but consider the following:

In the short term, market volatility has spiked due to the Trump administrations tariffs. The uncertainty for future prices of goods may impact company earnings and profitability. The longer the volatility remains, increases the flows into bonds. The shakeup should create an opportunity for lower interest rates, especially mortgages. In the near term, consider the Fed's short term monitory policy. If you have watched the Fed pressors, chairman Powell has reiterated the commitment to the 2% target rate. 2% represents the ideal inflation rate. Inflation has cooled tremendously over the past 4 years due to the increase in interest rates, quantitative tightening, resulting in demand destruction. Simply put its harder to afford a home post pandemic than pre-pandemic, partly due to the interest expense on a mortgage. It’s going to take time, but the Fed is steadfast on restoring the 2% target rate.

Longer term, consider the demographics of the aging population. Through the next few years, the US will have 11,000 people per day retire. That is a tremendous amount of people that are leaving the workforce and reducing consumption - buying less homes, automobiles, in general, less everything! Further, the onset of Artificial Intelligence is set to disrupt the economy in a major way. It will reduce the prices of goods and services and increase productivity. Like tariffs, it is hard to estimate the impact of A.I. and what it means to jobs and economic output. When you combine all of these factors, rising interest rates may be the least of your worries.

INFLATION

Inflation isn't inherently negative. In fact, some inflation is beneficial, indicating that people are spending and the economy is expanding. This is desirable, as deflation poses a greater threat, a contracting economy. Inflation refers to the rate at which the prices of goods and services rise over time. It can impact nearly any product or service, including essential costs like housing. The risk with inflation is that once it starts, it can spread throughout the economy, fueling expectations of continued inflation and becoming a major concern for consumers and businesses.

Inflation can arise from several sources, such as rising production costs linked to raw materials, a tight labor market, or disruptions like the pandemic. Add in higher demand, government spending, tax reductions, and lower interest rates there is more inflation. It is the responsibility of the Federal Reserve to keep inflation at bay. However, inflation can accelerate quickly, and when it does it can impact essential goods with higher prices. Additionally, inflation diminishes consumer purchasing power, reduces the value of currency, and can hinder saving returns.

The primary risk of inflation is that it acts as a lagging indicator. Price increases are only noticeable after the economic activities recorded. Just like the saying "where there's smoke, there's fire," economic activity is the initial sign, while inflation comes afterward, indicating the outcome of spending. This delayed characteristic of inflation is essential for comprehending its behavior and function in our economy.

Houses are regarded as asset goods, which means that during inflation, house prices typically rise at the same rate as inflation. This can become a self-fulfilling prophecy, as the increase in home prices during times of high inflation makes them more costly to finance. Higher inflation leads to an increase in interest rates, which in turn raises the cost and price of financing a home more than yesterday. This situation worsens the imbalance between housing demand and supply.

PURCHASING POWER

There may not be a single reason why homes are unaffordable; it's likely a combination of all the factors mentioned, known as purchasing power. Are home prices really the issue when the real problem is that your dollar loses value over time? Purchasing power is influenced by inflation or deflation, earnings or wages, interest rates, and some other factors. Purchasing power is determined by the amount of goods or services a unit of money can buy, usually in a round number like $100. Similarly, inflation can lead to the dollar's devaluation. In a consumer-driven economy, saved money becomes less valuable over time. For instance, if you save $1,000 at 2% per year, it grows to $1,020. However, if an item's price rises from $1,000 to $1,050 in a year, you've effectively lost $30 in purchasing power. That item costs more. Conversely, if home prices decrease, your purchasing power increases, allowing you to buy more house for the same amount of money, provided you have the same income.

While maintaining purchasing power is mostly beyond your control, there are some strategies to enhance it. You can earn more money, allowing you to afford more, or relocate to a region with a lower cost of living. During the pandemic, many people leveraged remote work to enhance their purchasing power. Workers from California moved their incomes to areas where they could afford larger homes or similar homes for significantly less money.

Interest rates have a comparable impact. When interest rates rise, borrowing becomes more expensive, which reduces the potential loan amount. On the other hand, if borrowing costs decrease, you can afford a larger loan, potentially leading to higher home prices. During the pandemic, interest rates remained significantly below long-term averages, creating conditions for the lock-in effect.

The notion of affordable housing is a misnomer. It was an issue even before the pandemic, but recent discussions have highlighted it is worsening. Achieving affordable housing requires two things, time, and good financials choices. Factors like home supply, prices, income, and interest rates are mostly beyond your control. Additionally, purchasing power diminishes the longevity of your savings and earnings. History shows that high inflation periods eventually end, offering opportunities for home ownership. Hopefully, by that time your income will have increased enough to catch up to home prices. If waiting isn't an option, consider finding a new job or starting a side business to boost your income. Alternatively, relocating to another state or region with a lower cost of living might offer a boost to your home ownership opportunities.

Housing, it is not a pretty sight right now. Personally, I would not want to be a buyer or seller in this market. Funny, housing has always appeared out of reach since 2001 when I got my start in the business. Your housing alarm clock may need to hit the snooze button but never give up hope. Housing needs you in the worst affordable way.

Is Now the Time to Use a HELOC?

With first lien mortgage rates fluctuating between six and seven percent, many have seen the potential in second mortgages, primarily through home equity loans or lines of credit. Whether referred to as a loan or a line, both offer a way to tap into equity without affecting the ultra-low rate of your first mortgage. The industry has called this the "lock-in effect"

https://www.experian.com/blogs/ask-experian/what-is-lock-in-effect/

Despite the higher rates, homeowners continue to borrow using any available means. Recently, Home Equity Lines of Credit [HELOCs] balances have risen by 10% year over year and 25% since 2022. Although this surge in popularity has raised some concerns, it's important to remember that these instruments are still near historic lows since the GFC. Mortgage Jinn examines the five W's of the HELOC to educate you on this traditional yet modern technique.

WHAT is a HELOC?

One way to view a Home Equity Line of Credit is as a large credit card that uses your home as collateral. A credit card is an unsecured debt, with limits primarily determined by your income and credit history. HELOCs operate under similar principles, but their limits depend on the amount of home equity you possess, which is based on your home's current market value and the balance of your first mortgage. Like a credit card, a payment is required when there is a balance. If there is no balance, there is no payment, and therefore no interest expense.

• In contrast to a conventional mortgage, the funds can be accessed as needed from the balance and repaid at any time. The scheduled payment reflects the balance; if the balance is reduced by half, the payment typically decreases by half as well. The interest expense is determined based on the daily balance, summed over the billing period.

• Funds are frequently allocated for home improvement projects but can also be utilized for debt consolidation, educational expenses, or emergencies. Because the money is secured by the home, it typically offers a lower interest rate well below rates from a credit card.

• HELOCs generally have variable rates that are indexed to the prime rate. Home Equity Loan rates are often fixed and based on a term ranging from 5 to 30 years. Similar to first mortgages, longer terms typically result in higher rates. The typical margin on average, it is about 1% over the prime rate. Any margin at prime or below prime is an excellent deal.

• The interest expense might be tax-deductible, unlike most unsecured debt. However, it probably needs to be invested in enhancing the home's value, with proper documentation. Depending on the balance of the first mortgage, it could eliminate or reduce the deductibility entirely, so consult a CPA.

WHO needs a HELOC?

As the name suggests, Home Equity requires homeownership. You can leverage a primary, secondary, or investment property, but it must be residential real estate. Additionally, similar to most loans originated after financial reform, borrowers seeking a HELOC must demonstrate their ability to repay. Unlike qualifying for a first deed of trust, you must qualify based on a payment calculated at a higher rate and a full draw of the line.

For instance, your line's effective rate might be 9%, with a requested limit of $100,000. The lender could qualify you at 1% to 1.5% of the requested limit, which translates to $1,100 to $1,500, and not the actual statement bill of $900. Additionally, certain credit minimums for scores and payment history will apply. Higher credit scores result in a lower margin relative to the index. Credit tiering can affect the line's size or the Loan to Value Max. Last, expect most HELOCs limitations to 80% of the total collateral, but lenders with a higher appetite may extend up to 95% of the home's value.

HELOCS like to use the Prime Rate as the Index, plus or minus a margin

WHERE to find a HELOC?

That's a great question with a challenging answer. Not all lenders are interested in these types of loans. Wells Fargo Bank, once a popular lender, removed this product from their offerings during Covid with no immediate plans to reinstate. Other major banks may offer them, but restricts the line size or reserve for existing banking customers. Credit Unions could be a good partner, offering several ways to customize them. Mortgage Brokers might have limited capacity for these loans or may charge an hefty fee. Generally, larger banks or credit unions offer the best terms, lower costs, and flexibility regarding property type.

WHEN to get a HELOC?

The ideal time to establish a credit line is when you don't actually need one. If your income is increasing, you have substantial equity, high FICO scores, and no immediate need for funds, secure a HELOC as soon as possible! Banks prefer lending to individuals who aren't in need of money, often providing competitive terms. To enhance many offers, banks frequently give a 0.25% discount to those who set up automatic payments from the originating bank. Similar to a mortgage, your income, assets, and property will be assessed, which requires time. Anticipate at least a 30-day processing period as your chosen lender will need to conduct a title search, verify your employment, and update your insurance.

WHY use a HELOC?

There are numerous benefits in this market that make HELOCs the preferred option. First, they have a lower acquisition cost compared to a traditional mortgage. Additionally, they enable you to leverage your home equity while maintaining the terms of your first mortgage. Furthermore, many HELOCs offer interest-only terms, allowing you to manage expenses with lower carrying costs. However, they typically have a higher cost of funds than the current rate on a30-year fixed mortgage. It's also important to consider them as a 1-month A.R.M.., as the prime rate aligns with the Federal Reserve's short-term policy, leaving you exposed to any increases. These instruments are ideal for short-term expenses that can be paid off in less than a few years. The standard term includes a 10-year draw period followed by a term loan up to 30 years with principal and interest payments. Some lenders offer the flexibility to fix the rate or convert it to a loan before the initial term ends. While there is no prepay penalty, lenders might impose an early termination fee if you close within three years of opening.

Until mortgage rates drop significantly - below 5%, expect balances and use of a HELOC to increase over time. According to recent "Fed-Speak," short-term interest rates are expected to improve throughout 2025, directly reducing the cost of borrowing on a HELOC. It's important to note that unless the HELOC was obtained as a purchase money mortgage on the home's acquisition date, combining it later with a first lien mortgage is still regarded as a "cash-out" refinance. This approach might result in refinancing two loans into one at a slightly higher rate than advertised. It may not be a concern for now, but eventually, your loan officer will hit your with a "?", WHEN did you acquire your HELOC?

Stay Thrifty,

-Matthew

What is Mortgage Insurance & paths to cancel PMI? [4 ways to drain MI!]

WHAT DOES MORTGAGE INSURANCE DO?

Mortgage insurance allows lenders to handle riskier loans by providing protection if you fail to make payments. If you purchased a home with a down payment of less than 20%, your payment likely includes a factor of mortgage insurance (PMI) in your conventional loan. Similarly, if you have a FHA loan, you pay a comparable charge known as a mortgage insurance premium (MIP).

These payments that protect the lender can add hundreds of dollars monthly to your mortgage payment. Certain loans require mortgage insurance and you must continue to pay the premium until you satisfy specific financial terms of your loan.

HOW IS MORTGAGE INSURANCE CALCULATED?

The monthly cost of mortgage insurance will depend on the type of loan and include several factors that include:

For a thumb nail sketch, you can easily estimate the monthly premium between a low of 0.5% to a high of 1% your total loan amount annually for mortgage insurance. Quick math, with a $100,000 home loan, this would amount to $500 to $1,000 per year, or approximately $42 to $83 month

PUT M.I. ON THE CLOCK!

There are several ways to remove your mortgage insurance. How quickly can depend on your loan type. The process for a FHA and a conventional loan will differ. If you have a FHA loan understand that you will have to pay MIP for 11 years or the full term of the loan based on the initial down payment. If you have a conventional loan there are several paths that include automatic, borrower, and terminal.

Automatic: If your payments are up to date and in good standing, your lender must cancel your PMI when your loan is set to reach 78% of your home's original value. The key word is "ORIGINAL" not the current.

Borrower: If your loan meets certain conditions and the loan-to-original- value (LTOV) ratio falls below 80%, you can send a written request to your mortgage company. First, contact the number provided on your mortgage statement to ask for the full requirements. Be aware that this will likely require a new appraisal, which you will need to pay. Your home's value may have increased due to appreciation or improvements you've made, such as a kitchen upgrade or a bathroom remodel. Make sure to consult your lender about any rules or prerequisites before you proceed with ordering your appraisal. Documentation of your improvements is critical with copies of checks, bank statements and paid invoices or receipts to confirm the proof is in the property.

Terminal: The HPA* is more than 25 years old and one of the provisions of the act was the elimination of MI once you are through the mid-point of your term. Most loans are 30 years and if you through 15 years of the amortization, it must be removed. You will need to be current on the mortgage.

* https://www.federalreserve.gov/boarddocs/supmanual/cch/hpa.pdf

OR, LEVERAGE A REFINANCE!

The drawback of simple methods is that they all require time. Maybe you purchased last year when rates were at their peak, while there is a chance you home value kept rising. Explore refinancing because it may help you lower the rate and reduce or eliminate your mortgage insurance.

For example:

If you bought your home for $100,000 and you borrowed $85,000 initially, you will have some factor of mortgage insurance as the original loan to value was 85%. If you have paid down your balance to $84,000 with the current market value of $105,000 then your current loan to value may be 80%. If you purchased your home with mortgage rates at 8% and the current rates are 7%, refinancing could potentially reduce your principal and interest (P&I) and mortgage insurance (MI) payments entirely.

Refinancing can be a quick cheat to rid yourself of mortgage insurance. If you haven't reached 20% home equity, the decision may depend on how quickly you can recover the closing costs through the improved monthly payment. Map out a break even analysis on the new loan. If you need help with organizing one, connect with us so we can assist in monitoring your mortgage for optimal rates and ways to reduce fees.

If you're interested in learning more about mortgages and refinancing, or if you have inquiries about eliminating PMI or MIP, get in touch with us. Contact Matthew via email for a quick Q&A (mortgage@mattthewsiket.com). Then, set up a timeline to aim for the removal of MI based on a future date. Reducing your payment by eliminating mortgage insurance will help you build equity more quickly and pay off your mortgage sooner. There are many ways to reduce MI; choose one and share your experience with your neighbors. Be a mortgage sleuth - don't let lenders sleep on your equity.