Housing Affordability

November 17, 2025

See the chart below?  Morgan Stanley’s economics team published that over the weekend.  That is the housing “affordability index”.  Specifically, it takes three variables:  (1) US new home price (median), (2) household income (median), and (3) the 30-yr mortgage rate.  

With the home price and the 30-yr mortgage rate, you can calculate the “median monthly mortgage payment” for any point in history.   Then you can compare that to median household income.  And THAT answers this key question: “What % of the average household income goes to an average mortgage payment?”   In other words, “affordability” in chart form.   Cool, right?

Look at the blue line.  The current level is slightly above the long term average — and WAY above the 2010-2020 average.  Why is that?  Two reasons:  (1) mortgage rates and (2) home prices.  

(1) Mortgage Rates

After the Great Financial Crisis (GFC) in 2008, the Fed dropped interest rates significantly.  The Fed was trying to get the economy growing again.  As a consequence, mortgage rates fell.  

See the chart below.  That’s the 3o-yr mortgage rate since 2001.

In the period 2010-2020, mortgage rates were the lowest in history.  And so affordability improved.  In 2021, COVID hit, so the Fed lowered rates again.  And the 30 yr fell even further!  

However, in 2022, inflation spiked.  So the Fed raised interest rates to counter inflation.  And in one of the greatest U-turns of all time, mortgage rates spiked from an all-time low to their 2001 level of 7%+.  You can see this in the chart too.  That whiplash instantly spiked the cost of buying a new home.

However, mortgage rates are falling a bit recently.  They are down versus last year.  And the trend suggests they will continue falling.  But they’re still nowhere near the levels in the 2008-2021 era.  And may not ever return.

(2) Home Prices

From 1990 to 2020, home prices grew +3.5% a year on average.  But in 2021, they spiked +22% in one year!   Why?  Well the Fed had dropped rates to zero.  At the same time, people were swimming in excess savings – they had stimulus checks; wages were rising; and discretionary spending was cancelled. (There was no spending on trips to Applebee’s – much less trips to Disneyworld.)  So they spent that money on buying a new house.   You can see it in the chart below of the new home price index.

Unfortunately, home builders also see that prices have leveled off for now.  So they are pulling back on new building.  Housing starts have been steadily drifting lower since 2021.

Prices are starting to fall a little bit now (down -1%-ish this year).  But prices are still elevated from the effects of the pandemic.

So let’s sum up:  why is housing affordability bad at the moment?  You had a perfect storm in 2021-2022:  both home prices and mortgage rates spiked within 12 months of each other.  And even 3-4 years later, incomes are struggling to catch up.

Fortunately, incomes are still growing (for the moment, at least).  And the Fed is slightly lowering rates.  But it’s unlikely we will see interest rates go back to zero (barring another crisis).  So we might not EVER see the affordability levels that we once saw in the 2012-2020 era.  Looking back at the chart at the beginning, our best hope might be for affordability to return to 20%-ish that we saw in the 90s and early 2000s.