The Growing Divide Between Affordability and Availability

The National Association of Realtors expects home sales numbers to grow this year, but at the expense of affordability. A new report by NAR and Realtor.com stated that existing-home sales could expand 1.7 percent in 2017, even though homebuyers at many income levels could see fewer listings on the market within their price range in the months ahead.

NAR’s Affordability Distribution Curve (ADC) method looked at the number of listings considered affordable to those in a particular income bracket and applied an affordability score between zero and two. A score of one or higher generally suggests a market where homes for sale are more affordable to households in proportion to their income distribution.

Reflecting a growing shortage of accessible inventory for most income groups, the entire ADC in January was below the equality line and the gap was generally wider at lower incomes, NAR reported. A household in the 35th percentile could afford 28 percent of all listings, a median income household (50th percentile) could afford 46 percent of listings, and a household in the 75th percentile was able to afford 74 percent of active listings.

January’s overall affordability score was 0.97, down from 0.92 a year ago. NAR blamed swift price growth and higher mortgage rates. Nineteen states had a score above 1, and three‒‒North Dakota, Alaska, and Wyoming‒‒saw year-over-year gains in their score.

Indiana (1.23) and Ohio (1.22) had the highest affordability scores in January. Iowa (1.18) and Kansas (1.17) were close behind, with Michigan and Missouri both reporting scores of 1.14.

Hawaii had the lowest affordability score in the nation, coming in at 0.52. California, the District of Columbia, Montana, and Oregon all reported scores between 0.6 and 0.67.

“Home prices have ascended far past wage growth in much of the country in recent years because not enough homeowners are selling and homebuilders have not boosted production enough to meet rising demand,” said Lawrence Yun, Chief Economist at NAR. “Amidst higher home prices and now mortgage rates, households with lower incomes have been able to afford less of all homes on the market last year and so far in 2017.”

Jonathan Smoke, Chief Economist at Realtor.com, said that consistently strong job gains and a growing share of millennials entering their prime buying years is laying the foundation for “robust buyer demand in 2017.” Smoke added, however, that buyers with a lower affordable price are seeing heavy competition for the fewer listings they can afford.

“At a time of higher borrowing costs, this situation could affect affordability even more as buyers battle for a smaller pool of homes and bid prices upward,” he said.

Smoke said that as we head into the spring buying season, available supply is more reachable for aspiring buyers in the upper end of the market and in nearly all Midwestern states. Meanwhile, he said, many states in the West and South have seen deteriorating supply levels over the past year.

“Buyers in these areas should know that it may take longer to find the right home at a price they can afford,” he said.

Yun said that the shortfall of inventory at a time of healthy job gains in most states is one of the biggest reasons for the depressed share of first-time buyers and the inability for the homeownership rate to rise above its near-record low.

“The only prescription to reversing this adverse situation is to build more entry-level and mid-market housing that aligns with current household incomes,” he said.