The Big Idea
Housing affordability inches up
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Affordability has been a substantial problem in housing over the past several years. Steep home price increases and relatively high mortgage rates have made it difficult for households to buy homes. In its September existing home sales press release, the National Association of Realtors touted “improved housing affordability” as a contributor to rising sales. However, the NAR’s own data on housing affordability suggests that the situation has only modestly brightened and is consistent with continued tepid demand.
Affordability index
The NAR publishes a simple housing affordability index on a monthly basis. The inputs are the median family income level, as reported by the Census Bureau, the median existing home price, included in the NAR’s existing home sales publications, and the prevailing mortgage rate, the effective rate on loans closed on existing homes from the Federal Housing Finance Agency.
Assuming a 20% down payment and a qualifying ratio of 25%—that is, the monthly principal and interest payment cannot exceed 25% of median family monthly income—the NAR calculates the level of income needed to qualify for a mortgage on the median priced existing home. An index reading of 100 would indicate that the qualifying income level is exactly equal to the Census Bureau’s median household income reading. A higher number means that the median income is more than sufficient (greater affordability), while a number lower than 100 means that a higher than median income level is needed to qualify for the median-priced home.
In practice, the Census Bureau data on the median income is reported on an annual basis with a long lag, so the NAR has to extrapolate forward using wage figures and the prior year’s pace of income growth. As a result, the income side of the calculation tends to follow a relatively smooth path in the most recent period (data are revised historically once the Census Bureau data are updated). The bulk of the variability in the index in real time stems from swings in the NAR’s measure of home prices and in mortgage rates.
Historical perspective
A quick reading of the NAR Affordability Index reveals that the index appears to be driven mainly by the level of mortgage rates (Exhibit 1). Affordability plunged in the late 1970s and early 1980s, when mortgage rates surged to a high of 18%, gradually recovered in the 1980s and 1990s, surged in the 2000s, when Chair Greenspan’s “conundrum”—falling long-term rates even as the Fed was raising its policy rates—prevailed, and stayed at elevated levels throughout the period after the financial crisis, when rates were historically low. Then, in 2022, when borrowing costs soared, affordability plummeted.
Exhibit 1: NAR Housing Affordability Index
Source: National Association of Realtors.
Even during the housing boom, when home prices were soaring, affordability was actually rising because falling mortgage rates were a more powerful force than rising prices. It was only in 2006 and 2007, when mortgage rates ticked up that affordability eroded. For anyone who has ever spent time plugging numbers into a mortgage payment calculator, this was probably already obvious. In any case, mortgage rates account for 84% of the movement in the NAR Affordability Index, providing some hard statistical backing to the visual observation. Plotting the Freddie Mac 30-year mortgage rate on an inverted scale against the NAR index further illustrates the point (Exhibit 2).
Exhibit 2: Affordability index and mortgage rates
Source: NAR, Freddie Mac.
Current conditions
The post-pandemic period has been a particularly difficult one for housing affordability. Households have been squeezed by a double whammy: mortgage rates shot up when the Fed had to sharply raise its policy rate to tamp down inflation at the same time that home prices were surging. Affordability fell below 100 for the first time since the mid-1980s, a period when mortgage rates were still in the teens. For perspective, the historical average for the NAR Affordability Index is 126.
The Affordability Index averaged 97.6 in 2023 and 98.8 in 2024. There have been a few relatively modest swings in affordability so far in 2025. Affordability improved early in the year, when mortgage rate slid from almost 7% at the turn of the year to an average of 6.64% in March. Affordability improved by close to 5%, rising to as high as 103.5 in March. Then, once it became evident that expectations of aggressive Fed easing in early 2025 would not come to fruition, mortgage rates backed up, returning to nearly 7%, and affordability slid to a low of 95.1 in June. Since then, mortgage rates have declined again, nudging the Affordability Index back up to 100.5 in August (the September reading will presumably inch up further but was not yet available as of this writing).
The main takeaway is that while affordability has improved at the margin in recent months, it remains poor by historical standards, around 25% lower than the all-time average, and has not moved by enough to plausibly anticipate a sharp revival in demand.
The relationship between the NAR Affordability Index and home sales over the past decade, not surprisingly, is tight (Exhibit 3). The chart shows that the modest improvement in affordability seen through August should be expected to drive only a slight rise in home sales. In fact, the uptick in combined new and existing home sales from a 4.6 million unit annualized pace in June to a 4.8 million unit clip in August may be close to the entirety of what we can expect to see unless affordability rises noticeably further going forward.
Exhibit 3: Affordability Index and Combined New and Existing Home Sales
Source: NAR, Census Bureau.
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