Housing Affordability Shows Signs of Weakening as Challenges Lie Ahead

Housing affordability weakened slightly during the first quarter of 2021 as rising material costs and supply shortages along with expected increases in mortgage rates stemming from a growing economy are likely to exacerbate affordability challenges in the year ahead.

According to the NAHB/Wells Fargo Housing Opportunity Index (HOI) released today, 63.1% of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $79,900. This is slightly down from the 63.3% of homes sold in the fourth quarter of 2020 that were affordable to households earning the median income of $78,500.

“After a surprising gain for housing affordability in 2020 that was driven by historically low interest rates, housing emerged as a bright spot for the overall economy,” said NAHB Chairman Chuck Fowke. “However, the first quarter reading of the HOI is an indication that affordability will further decline this year as higher lumber and other material costs and longer construction times will act as headwinds for the market.”

“While economic growth in 2021 will be at the highest growth rate since 1984 and the labor market will continue to improve, higher home prices and an expected rise in interest rates will price some prospective home buyers from the market,” said NAHB Chief Economist Robert Dietz. “More housing supply is needed to bring home price growth back to sustainable levels.”

The HOI shows that the national median home price held steady at $320,000 in the first quarter, unchanged from the fourth quarter. Meanwhile, average mortgage rates increased by 11 basis points in the first quarter to 2.96% from the previous all-time low of 2.85% in the fourth quarter.

The first quarter 2021 HOI provides a significant revision for the 2020 data. The revised HOI for 2020 reflect last year’s estimates for median family income published by the Department of Housing and Urban Development prior to the COVID-19 pandemic. To account for the pandemic’s effects, NAHB in March 2020 adjusted HUD’s median income estimates lower. Since the virus crisis did not negatively impact median incomes last year, NAHB recalculated the four HOI quarterly reports for 2020 accordingly. This had the effect of increasing the affordability measures for 2020, which is consistent with strong buyer demand from last year.

The Most and Least Affordable Markets

Lansing-East Lansing, Mich., was the nation’s most affordable major housing market, defined as a metro with a population of at least 500,000. In Lansing-East Lansing, 91.8% of all new and existing homes sold in the first quarter were affordable to families earning the area’s median income of $79,100.

Rounding out the top five affordable major housing markets in respective order were Pittsburgh, Pa.; Youngstown-Warren-Boardman, Ohio-Pa.; Scranton-Wilkes-Barre-Hazleton, Pa.; and Harrisburg-Carlisle, Pa. Meanwhile, Cumberland-Md.-W.Va., was rated the nation’s most affordable smaller market, with 97.5% of homes sold in the first quarter being affordable to families earning the median income of $60,800. Smaller markets joining Cumberland at the top of the list included Fairbanks, Alaska; Monroe, Mich.; Wheeling, W.Va.-Ohio and California-Lexington Park, Md.

For the second consecutive quarter, Los Angeles-Long Beach-Glendale, Calif. remained the nation’s least affordable major housing market. There, just 11.6% of the homes sold during the first quarter were affordable to families earning the area’s median income of $78,700.

In fact, the top five least affordable major markets were all located in California. In descending order, San Francisco-Redwood City-South San Francisco; Anaheim-Santa Ana-Irvine; San Diego-Carlsbad; and Oxnard-Thousand Oaks-Ventura rounded out the top five.

Four of the five least affordable small housing markets were also in the Golden State. At the very bottom of the affordability chart was Salinas, Calif., where 15.1% of all new and existing homes sold in the first quarter were affordable to families earning the area’s median income of $80,900.

In descending order, other small markets at the lowest end of the affordability scale included Corvallis, Ore.; Napa, Calif.; San Luis Obispo-Paso Robles-Arroyo Grande, Calif.; and Santa Cruz-Watsonville, Calif. Visit nahb.org/hoi for tables, historic data and more details.