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The Issue: Housing Affordability and Supply
For the past several years, there have been a growing number of voices recommending that in order to address the housing affordability problem, we need to build more housing. Indeed, according to basic economics, when the demand for housing exceeds the supply, housing costs rise. Thus, housing affordability could increase if there were enough homes available for sale.
It's very promising to see housing inventory recovering from last year's record lows, even though the rise is slow. The number of homes available for sale has increased by more than five percentage points compared to a year ago, surpassing one million units, according to the National Association of REALTORS®.
Nevertheless, housing supply continues to remain low, outpacing housing demand even though activity is slower due to low affordability. Even though home sales are trying to recover and are highly sensitive to changes in mortgage rates, multiple offers are still common, implying that more housing supply is needed to accommodate demand.
Estimating What's Needed for a Balanced Housing Market
While there are various ways of estimating how many homes need to be added to the market, it's important to take into consideration that not everybody can afford to buy the same homes. Depending on their income, buyers can afford to purchase homes at different price levels. For instance, households earning $75,000 – the median household income in the U.S.– can afford to buy a home up to $256,000. Thus, when estimating the number of homes that are missing, we need to specify how many homes are missing by price range.
The current analysis indicates that, even with the existing level of homes available for sale, the housing affordability and shortage issues wouldn't be so severe if there were enough homes for all income levels. Put simply, there are currently more than one million homes available for sale. If these homes were dispersed in a more adequate match for the distribution of households by income level, the market would better serve all households. In contrast, while household formation is rising faster than homes are being built, these missing homes in the middle- and lower-income price range add to the mismatch between housing demand and supply. For example, nearly 51% of households earn $75,000 or less. In a balanced market, these households would be able to afford to buy 51% of the homes available for sale. However, only 23% of the listings currently have a price lower than $256,000,which is the maximum price of a home that these households can afford to purchase. However, in the higher income levels, there are fewer listings missing. For instance, buyers earning $250,000 can currently afford to buy 85% of the listings compared to 93% in a balanced market.
Thus, a two- fold approach is needed. To address both low affordability and the housing supply shortage, building homes for all income levels could help.
NAR's Report
NAR Research and Realtor.com® partnered to estimate how many homes are missing by income level. After defining the maximum value of a home that households can afford to buy for each income level, the current study compares the number of homes that are available and affordable for them now versus what they should be able to afford in a balanced market. The market is closer to equilibrium when homes on the market are affordable to households in proportion to their income distribution. Put simply, half of the homes on the market need to be in the price range that middle-income buyers can afford to purchase.
Since all real estate is local, the report also provides the number of homes that are missing by income level for the 100 largest metro areas. As expected, due to low affordability, inequalities in housing availability among income levels are even larger in expensive big city centers.
Thus, identifying the number of homes that are missing for each income level is what makes this analysis unique and can help the federal and local governments to tackle the two-fold issue of low affordability and low supply of homes.