The news reports are hard to ignore – and seem to come from all parts of the country.

“The United States is facing an affordable housing crisis,” wrote Curbed, an online news site that covers U.S. real estate.

“Florida is in the throes of an affordable housing crisis,” a panel of housing experts told lawmakers in Tallahassee, the Tampa Bay Times reported.

“Unless you’re making a lot of money right now you can’t afford a house in this country,” U.S. Sen. Jon Tester, who represents Montana, said at a congressional hearing.

Given the ongoing surge in home prices and recent spike in interest rates, it’s little wonder that the cost of housing is a hot topic. Policymakers and activists have long advocated for a variety of programs and solutions to address a shortage of affordable housing.

To be sure, housing affordability has weakened as housing prices have increased since the onset of the COVID-19 pandemic — to all-time highs in some markets — while mortgage rates have jumped since March as the Federal Reserve Board increased its base rates to combat rising inflation. Even so, assessing the magnitude and scale of housing affordability yields varying results. It depends on the measurements used and the geographic areas studied.

A measure of affordability

Housing is generally considered affordable if it costs no more than 30% of a family’s gross annual income, according to the U.S. Department of Housing and Urban Development, which uses this benchmark to determine whether families qualify for housing programs.

We explored whether the overall the U.S. housing market is affordable by creating an index using three variables:

1. HUD’s estimate of U.S. median family income: $90,000 in 2022. For comparison, that’s a 12.6% increase from $79,900 in 2021.
2. The Federal Reserve Board’s report on the median sales price of houses sold nationwide: $440,300 as of the second quarter of 2022. By this measure, the price of homes sold has risen at a faster clip than family incomes — up 15.1% from $382,600 a year earlier, according to the St. Louis Federal Reserve.
3. The prevailing 30-year fixed mortgage interest rate, which stood at 5.7% in June 2022, according to Freddie Mac. This rate has nearly doubled from 3.0% in June 2021.

Our calculations show the U.S. housing market produced an annual index greater than 100 each year from 2000 to 2021. (Figure 1) An index equal to 100 indicates that a family with a median income has exactly the amount needed to afford a median-priced home. Thus, an index over 100 implies that housing is affordable. In 2021, the index stood at 122, marking the 22nd consecutive year the index was in the “affordable” category.

An index equal to 100 indicates that a family with a median income has exactly the amount needed to afford a median-priced home.

Figure 1 — Sources: Federal Reserve Economic Data (FRED), HUD, Freddie Mac as of August 2022

However, this story has turned a page this year, as U.S. home prices have continued to spiral upward while mortgage rates have jumped. Our latest calculations result in an index of 92 as of the second quarter 2022 (see Figure 1), meaning that a typical family would have spent more than 30% of its income to buy a median-value home. This is the first indication of national housing unaffordability since 2000.

The result: A one-two punch of escalating home prices and rising mortgage rates has put the American dream of homeownership out of reach for more people.

The fundamentals: supply and demand

Digging deeper into what’s going on, consider that houses — at least in one aspect — are like tacos, bicycles and cellphones: They’re all consumer products. That means their price is largely a function of supply and demand. Demand for housing increases when more people form households. Homebuilders respond by building more supply. The balance determines the amount of appreciation in house prices.

For more than a decade, the U.S. housing market tightened as the number of households have grown at a faster rate than the U.S. housing stock, according to data from the U.S. Census Bureau and the Federal Reserve. In 2010, the supply of houses was 10.8% more than households; the gap shrunk to 8.5% in 2021. (Figure 2)

Figure 2 — Source: Federal Reserve Economic Data (FRED) as of May 2022

The numbers reflect that the housing market needs a minimum vacancy level to account for relocations and for those who own more than one property. These and other factors mean the country needs a larger housing stock than the number of households. This gap determines whether a market is loose (many excess homes) or tight (few extra homes).

Figure 3 — Sources: Federal Reserve Economic Data (FRED), Freddie Mac as of May 2022

Another major factor affecting house affordability is the prevailing mortgage rate. Figure 3 shows the inverse relationship of mortgage rates on house prices. From 2000 to 2021, the rates for 30-year mortgages have steadily fallen from 8.1% to 3.0%. This has spurred demand and pushed up house prices. At the same time, however, the declining rates generally improved overall housing affordability. Lower mortgage rates allow buyers to pay a higher price for housing by lowering the interest payments.

But affordability shifts rapidly when mortgage rates change sharply, as we’ve seen this year. The surge in mortgage rates in recent months is the chief reason housing affordability has fallen below 100.

Moreover, while construction of new housing has been ticking up in recent years, it hasn’t been enough to satisfy demand. Figure 4 shows that fewer homes were built in the decade of 2010 to 2019 than in any decade dating to the 1970s. Moreover, the number of active housing listings decreased 63% since the onset of the pandemic, according to the St. Louis Federal Reserve Bank. The basic principles of economics tell us that prices will rise if demand continues to exceed supply.

Figure 4 — Source: Federal Reserve Economic Data (FRED)

Geographic affordability

To see where affordability may be most problematic today, we looked to the housing affordability index by metropolitan area published by the National Association of Realtors (NAR). Our affordability measure and our results are very similar to NAR’s index. NAR’s data allows a comparison of affordability across geographic areas.

NAR analyzed 174 metropolitan areas and ranked them according to affordability. Unsurprisingly, the most unaffordable metro areas are in coastal areas with large urban cores. Demand for housing in these markets exceeds supply — certainly relative to more affordable locations.

Economic fundamentals dictate that high demand must be met with increased supply to dampen price appreciation. If demand in these cities is high, then the solution is to build more housing. However, many local governments have made the residential development process increasingly difficult and time-consuming. In some cases, they have virtually curtailed the building of new homes by implementing increasingly restrictive zoning and land-use policies.

“How to Increase Housing Affordability? Understanding Local Deterrents to Building Multifamily Housing,” April 12, 2022, By Amrita Kulka, University of Warwick; Aradhya Sood, University of Toronto; Nicholas Chiumenti, Federal Reserve Bank of Boston

Researchers at the University of Pennsylvania and Harvard University created the Wharton Residential Land Use Regulatory Index (WRLURI) to identify where land-use regulations are the most restrictive. The latest WRLURI ranked 2,450 largely suburban communities by the restrictiveness of the building regulations, based on surveys of residential land use regulators in 2018. The WRLURI includes 12 subindexes designed to gauge the restrictiveness of a jurisdiction, such as local political pressure, state political involvement, minimum lot sizes, impact fees, and requirements for open space and affordable housing. Highly regulated places are apt to be more regulated “on multiple dimensions,” wrote the authors of the Wharton index. “These places tend to have at least three different entities that must approve (and, thus, can veto) a project.”

Comparing the WRLURI’s rankings of communities by restrictions and NAR’s housing affordability we discover a striking similarity. As shown in Figure 5, half of the 20 most expensive housing markets are also on the list of 20 markets with the strictest regulations. From this comparison, we see that highly regulated jurisdictions are strongly correlated with expensive housing.

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Areas with High Housing Prices and Most Restrictive Places to Build

Metropolitan areas indicated (*) below are the top of the index ranking for both the least affordable housing markets and those with the most restrictive land-use regulations.

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Despite the importance of zoning and land-use policies in a well-functioning community, overly restrictive policies can damage housing affordability in cities if they prohibit the construction of needed supply. Consider the state of California, which is known for having some of the most expensive housing markets in the country. The top five most unaffordable metro areas are in California, according to NAR. Some of the markets face housing development challenges due to geographical limitations, such as ocean or mountains, that are complicated by tight regulations.

A zoning map of the San Francisco Bay area, NAR’s third-least affordable market, shows that 82% of the residential areas are zoned for single-family housing, according to the University of California, Berkeley’s Othering and Belonging Institute. By limiting the density to one unit per lot in a highly constrained geography, San Francisco suffers a self-inflicted supply and demand problem.

Beyond zoning, the approval process can be a burdensome and lengthy process for developers. In fact, according to survey results from WRLURI, highly regulated jurisdictions take an average of 8.4 months, or 252 days, to fully review a residential development application. As local jurisdictions make the regulatory and approval process increasingly difficult to navigate, developers and homebuilders will face elevated costs that must be added to the sales price, or they will build elsewhere. One option to assist affordability is to relax building restrictions and encourage the construction of more housing supply.

New solution, new challenge

But the simple solution of easing land-use and zoning requirements to encourage building may prove difficult to implement. Local governments must weigh several thorny factors when considering changing zoning policies and density requirements. Most notably is the political opposition. Local homeowners with a not-in-my-backyard (NIMBY) attitude make the development of more units exceedingly difficult. Wanting to protect their property values, owners whose homes are in neighborhoods protected by single-family zoning are often the first to voice their concerns. (See related story, Some Communities Take on Single-Family Zoning in Hopes of Spurring More Housing.)

Scholars who study land-use regulations have concluded that opposition by existing homeowners is a key constraint to adding single-family and multifamily homes in many communities.

Although “lowering housing costs through zoning reforms may help first-time homebuyers and lower-income renters, it comes at the expense of — and thus will likely generate substantial political opposition from — current homeowners,” according to an April 2022 working paper from researchers at the University of Warwick, the University of Toronto and the Federal Reserve Bank of Boston.

Homeowners are concerned that loosening zoning restrictions to allow, for example, duplexes and multifamily projects would harm the character of their neighborhood and lower home values. The potential lost value is an empirical question, but the resistance is political and difficult to overcome. A more subtle issue is identifying funding sources to pay for infrastructure improvements needed to support the increase in an area’s population density. Adding housing inevitably increases the demand for investments in roads, schools, hospitals, public transportation and other public services.

In the end, the growing chorus of people claiming the U.S. housing market is unaffordable can point to several factors that have pushed median home prices to all-time highs. These boil down to two principal culprits: robust demand and limited supply of new homes.

Yet our analysis of the national market, using HUD affordability definitions and Federal Reserve data, suggests it is very hard to claim that U.S. housing has been unaffordable — at least through last year. However, this perspective has changed dramatically in the face of this year’s spike in mortgage rates. Undoubtedly, asserting that housing is affordable will likely be much more difficult over the next couple of years than it was over the past two decades.

While increasing the supply of houses would go a long way to addressing the affordable housing challenge, adding housing density comes with an array of complications and obstacles, especially if proposed solutions are not carefully tailored to fit the needs of individual markets.

Understanding and identifying the reasons a particular community suffers a scarcity of affordable housing is an important first step to meaningfully address this multifaceted issue.

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Methodology

The housing affordability measure we use is adapted from the index used by the National Association of Realtors (NAR) to account for the definition of affordability set by the U.S. Department of Housing and Urban Development (HUD).

Since 1981, the HUD definition of affordable has been housing costs, including utilities, that do not exceed 30% of gross family income.

This measure applies 25% of family income to the debt service required to repay the mortgage necessary to purchase a house. Our affordability formula is:

ADS is the annual debt service required for a 30-year fixed-rate mortgage at the prevailing interest rate.

A ratio equal to or greater than 100 indicates that housing is affordable at 30% of income and a ratio below 100 indicates that housing is unaffordable or more than 30% of income is required.

Limitations

This study focuses on median house prices and median family income as a broad measure of affordability.