Homes Are the Least Affordable Since 2008—Here's Why and What to Do About It

The most recent Home Ownership Affordability Monitor (HOAM) published by the Federal Reserve Bank of Atlanta reveals that homes are becoming less affordable. In fact, we're at affordability levels not seen since the Great Recession of 2008.

But what's considered affordable? In a nutshell, the Fed defines affordability as follows: when all the monetary components of housing costs account for less than 30% of median household income. The HOAM index gauges the cost of homeownership based on the median price of homes in that particular area. For example, in Los Angeles, the index compares the median price of homes in that city against the median income for Angelenos.

Ryann Ford

In just one year, there's been a double-digit decline in home affordability, according to the HOAM index, using the latest available data (September 2021).

"Affordability in September declined by 11.3% in September 2021 over September 2020," says Domonic Purviance, subject matter expert on residential real estate at the Federal Reserve Bank of Atlanta. "A median-income household would need to spend 32.14% of its income on housing, making this the highest cost of ownership since 2008."

Contributing Factors to a Lack of Affordable Homes

So, what's causing homes to slip further out of reach? "Higher home prices and rising interest rates were the primary drivers of decline," Purviance says.

Through October 31, 2021, the typical home in the U.S. cost $312,728, according to Zillow. But Zillow predicts that by October 31, 2022, the typical home will increase in price by 13.6%.

Bill Golden, a realtor/associate broker at RE/MAX Around Atlanta, Georgia, points to the imbalance in the real estate market as a major factor making homes unaffordable. "For some time now, there have been significantly more buyers out there than sellers, which tends to amp up competition, which in turn makes the prices go up," he says.

And since the market is so competitive, resulting in bidding wars, buyers are looking for anything to stand out. For example, Golden says there's been an increase in cash offers. "In this type of market, investors and anyone else who has the means to make a cash offer will do so, which effectively knocks out the typical home buyer," he explains. "Cash offers, which are perceived as being more solid, are more appealing to a seller, so the typical buyer who needs to get a mortgage, will lose in a competitive offer situation." And Golden says this practice is contributing to the decrease in home affordability.

Related: Here's Why You're Getting Offers to Buy Your House—Even When It's Not for Sale

Interest rates reached historic lows, but the Mortgage Bankers Association (MBA) predicts the 30-year, fixed-rate mortgage, currently hovering around 3.18%, will increase to 4.0% by the end of 2022.

"As the Fed, we do not necessarily take a position on whether homeownership affordability 'should' increase or decline," Purviance says. "However, it is true that a decline in affordability can lead to fewer households being able to afford to purchase a home."

To reverse this trend, he says that either home prices would need to decline or household incomes would need to rise. "The other thing that could happen that would increase affordability is for rates to decline, but this is hard to imagine, since rates are still near historic lows, despite increasing slightly over the past few months."

Finding a Home

So how can buyers position themselves to deal with the decline in home affordability, move forward, and get the best deal on a home? According to Golden, one option is to sit it out for a while, in hopes that the market will stabilize somewhat. "That solution has its risks, however, since prices could get even higher if you wait," he says. He also acknowledges that some buyers might not be able to wait it out if they need to buy a home now.

"Another solution is to alter your needs and expectations in selecting a home to buy," he says. If you're willing to compromise a bit on either the location or the condition of the home, Golden says you might be able to find a property with less competition.

"The most move-in-ready homes in the most desirable locations are always going to have the most people bidding on them, which means they'll go for a higher price," Golden says. "Be creative; maybe you'd be ok being on a slightly busier street or having to renovate a kitchen."

In addition, he says this is not the time to go it alone when looking for a house in such a tight market. "You need a real estate agent—and this person should be someone who knows the market well and is highly experienced because they are going to have to leverage relationships and every nuance they can on your behalf."