If Housing Is So Affordable, Why Doesn't It Feel That Way?

Housing is at near-record affordability, and I can prove it.

The Housing Affordability Index (HAI) developed by the National Association of Realtors is perhaps the most-widely-cited measure of housing affordability. Currently, the HAI is at near-record highs, which means the median-income family has more than enough income to qualify for a mortgage to buy the median-price house.

But it sure doesn't feel like housing is affordable. If you don't believe me, check out these recent headlines:

• A Housing Affordability Crisis That's Worse for the Lowest Income Americans (PBS, 2017)
• Rising Home Prices, Rents Spur Housing Affordability Concerns (eCredit Daily, 2017)
• An affordable-housing shortage in the US is about to get worse (Business Insider, 2017)
• Harvard Report Raises Housing Supply, Affordability Issues (Mortgage Daily News, 2017)

Here are 3 key reasons homeownership feels out of reach to many of us.

Houses are expensive. Nationally, house prices are higher now than they were at the pre-crisis peak in 2006. House prices have risen over six percent per year on average since the house price trough in 2012, and they show no sign of slowing down. Incomes, however, have not kept up. Per capita income increased only 2.4 percent on average per year over the same period.

Houses are hard to find. The limited supply of available homes increases the perception that homes are unaffordable. New listings are snatched up quickly, many by cash buyers. Bidding wars are commonplace. To make matters worse, the challenge of finding a new home discourages some existing homeowners from listing their current residences.

The imbalance between the demand for and the supply of homes boosts house prices further and can transform the perception of unaffordability into actual unaffordability.

Borrowers are uncertain if they can qualify for a mortgage. The HAI tells only part of the story—it measures whether the median-income family has sufficient income to comfortably cover the monthly mortgage payment on the median-price house. But there are other qualifications as well.

• Does the borrower have too much outstanding debt (the most common reason for rejecting a mortgage application)?
• Is their credit score high enough? Do they even have a credit score? There are millions of credit invisibles—people without enough credit history to show up on the radar of the credit rating agencies.
• Can the borrower document a stable income? Self-employed people and workers in the gig economy may face some challenges
• Does the borrower have enough cash for a down payment? This is one area where Freddie Mac offers some solutions through its Home Possible Advantage® mortgage that allows borrowers to put as little as three percent down, and even that modest down payment can come from a family member gift or a government grant.

Undeniably, the mortgage process can make potential borrowers uncertain of their chances at homeownership. My Home by Freddie Mac® provides information on many aspects of homebuying and successful homeownership. Our CreditSmart® curriculum offers online financial training.  And our Borrower Help Centers offer face-to-face assistance for prospective homeowners.

It's easy to see why homeownership feels unaffordable to so many people. But the HAI isn't kidding—mortgage payments are more affordable today than at almost any time in history. As for the challenges listed above, Freddie Mac and others are helping borrowers navigate their way through the complexities of the mortgage process. They'll even help borrowers figure out when they're financially ready for homeownership.