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The chart above compares median household income relative to the income needed to purchase a median-priced home. A higher reading means that homes are more affordable, while a lower reading indicates that it is more difficult for Americans to keep up with housing costs. As one would expect, in the late 2000s at the height of the housing bubble, home buyer affordability was at a record low. In the years that followed, affordability skyrocketed as real estate prices crashed. Now, a decade removed from the depths of the housing crisis, real estate prices have rebounded, and affordability is once again falling.
We believe it is very possible that the affordability index could continue falling in the near-term for two key reasons. First, prices on key housing inputs such as wood, steel, and aluminum have gotten much more expensive in recent months, largely a result of tariffs enacted in the recent trade dispute. Also, interest rates on mortgages are slowly being ratcheted up in response to tightening monetary policy. These two factors together are driving housing prices higher and making monthly mortgage payments larger, which when coupled with slow earnings growth results in increasingly less affordable homes. The decline in home affordability is no cause for panic yet, as the index is working back to a normal level coming off the biggest housing market collapse in U.S. history, but is something we are watching closely.
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