Introducing the Atlanta Fed’s Home Ownership Affordability Monitor (HOAM) 2.0

October 16, 2024

Overview

The Federal Reserve Bank of Atlanta's Home Ownership Affordability Monitor (HOAM) is a tool that is updated monthly and tracks emerging trends in homeownership affordability at the national, metro, and metro-county levels. Affordability is determined by whether the median-income household can afford to own the median-priced home currently selling in the market. Based on the US Department of Housing and Urban Development (HUD)'s 30 percent affordability threshold, if the median-income household would need to spend more than 30 percent of its income to own the median-priced home, then homeownership is considered unaffordable. If it is less than 30 percent, then home ownership is considered affordable. This 30 percent threshold is represented by an index of 100 in HOAM, with a value above 100 being affordable and below 100 being unaffordable. The costs associated with homeownership in HOAM include principal and interest costs, property taxes, property insurance, and private mortgage insurance.

With this October 2024 update, HOAM has been rebuilt to include new data sources, enhanced graphics and visuals, and data-sharing options. The following article is an overview of recent homeownership affordability data using the new HOAM tool capabilities. (For more information, please visit the HOAM webpage HERE.)

Highlights

• Despite declining interest rates, homeownership remains unaffordable for the median-income household nationally.
• Though down by 200 basis points from July, the share of income needed to afford the median-priced home remained near record highs at 42 percent, as rising home prices, property taxes, and insurance costs offset some of the benefits created by declining interest rates.
• The income needed to afford the median-priced home stood at just under $120,000 in August, which was still near historic highs reached in May of this year, and 40.3 percent higher than the current actual median income nationally ($85,255).
• Although optimism has improved as rates declined, homebuyers remain concerned about the lack of affordability. This led to a slower recovery of demand and an increase in incentives and price cuts on homes available for sale.

Homeownership Affordability Trends

Chart 1 displays homeownership affordability at the national level. It allows toggling between the two views of affordability: "Share of Median Income" and the "Affordability Index." The "Select Metro" dropdown option allows the selection of different metro areas.

Chart 1: Homeownership Affordability Trends

In the Affordability Index mode, chart 1 shows that, over the past two years, homeownership affordability at the national level dropped to levels rivaling those seen during the Global Financial Crisis (GFC, 2007-2009). As of August 2024, the HOAM Index stood at 72.9, well below the affordability threshold of 100.

Between July and August, the homeownership affordability index remained relatively flat, declining by 0.6 percent. Meanwhile, affordability declined by 3.6 percent from August 2023 to August 2024. This year-ago decline in affordability is somewhat moderate compared to recent trends. Over the past year, the average year-ago decline at the national level in affordability was 7.5 percent.

Drivers

Chart 2 illustrates a decomposition of the drivers of homeownership affordability. Affordability drivers include taxes, property insurance, mortgage rate, median sales price, and median household income. The "Select Metro" dropdown option allows the selection of different metro areas.

Chart 2: Drivers

Over the past two years, the combination of sharply rising home prices (represented in blue in chart 2) and an increase in mortgage interest rates (represented by gray in chart 2) have had the strongest negative effect on home affordability. When mortgage rates started to rise in 2022, demand for housing contracted sharply across the country, increasing the risk of a downward shift in home prices. However, many homeowners who refinanced their mortgages at record-low rates during the pandemic lacked an incentive to sell their home once rates started to rise. This "rate lock" effect led to a sharp decline in homes available for sale.

The decline in demand combined with the subsequent decline supply helped keep prices from falling substantially. In fact, even as interest rates have started to decline (down to 6.5 percent in August 2024 from 7.1 percent in May 2024), the lack of inventory has pushed prices higher (up by 5.2 percent from May to August 2024). Meanwhile, the positive impact on affordability created by the growth in median household incomes (represented in green in chart 2) has begun to wane as wage growth slowly normalizes from the recent peaks experienced during the spike in inflation in 2023. Rising property taxes (represented in orange in chart 2) are also becoming an additional drag on affordability as home values have increased. Lastly, though not as much of a factor at the national level, rising property insurance costs have also had a negative impact on affordability, especially in regions deemed a higher risk by insurance companies, such as Florida and California.

Affordability Gap

Chart 3 compares actual median income over time to the qualified income-that is, the income needed for annual homeownership cost to equal no more than 30 percent of annual income. The "Select Metro" dropdown option allows the selection of different metro areas.

Chart 3: Affordability Gap

Since the end of the GFC the income a household needed to keep its annual housing cost at or below the 30 percent affordability threshold-that is, the qualified income-has trended below the actual median-household income nationally. In other words, a household with a median income could easily afford the median-priced house. This has changed since the pandemic as both prices and mortgage rates rose. Since 2022, the qualified income has risen sharply and, as of August 2024, remains near record highs at $119,640, which is 40.3 percent higher than the actual median-household income of $85,255 for the nation.

Price/Income

Chart 4 displays the price-to-income ratio for US metros compared to the United States as a whole. The "Select Metro" dropdown option allows the selection of different metro areas.

Chart 4 Price/Income

The price-to-income ratio is used to measure how well incomes are keeping up with home prices. Since the onset of the pandemic, home prices rose faster than incomes, which caused the price-to-income ratio to rise to a level rivaling the run up to the GFC. Although declining with the acceleration of wage growth in 2022 and 2023, the price-to-income ratio remains near historic highs at just over 4.5.

Share of Income

Chart 5 allows comparison between the share of median income needed to own the median-priced home over time in specific US markets compared to the national overall. The "Select Metro" dropdown option allows the selection of different metro areas.

Chart 5 Share of Income

In August, the median-income household ($84,255) would have needed to spend 42 percent of its annual income to own the median-priced home nationally ($395,667), a share well above HUD's 30 percent affordability threshold.

As of August 2024, 66 percent of all metro areas in the nation were unaffordable-that is, a household making the median income in the area could not afford to own the median-priced home. Coastal markets in California (such as San Francisco and Los Angeles) and Florida (Key West-Key Largo) were among the nation's least affordable while markets in the Midwest (for example, Indianapolis and Sioux City) were more affordable.

County Level

Chart 6 compares the share of median income needed to own the median-priced home over time within counties and parishes in US markets and the nation.

Chart 6 County Level

Cost Breakdown

Chart 7 provides a breakdown of the costs associated with owning the median-priced home. Cost components include property taxes, private mortgage insurance, property insurance, and principal and interest.

Chart 7: Cost Breakdown

In August 2024, the monthly payment for the median-priced home was $2,997, down from 3 percent from a month earlier due mainly to the decline in mortgage rates. The principal and interest costs comprised the largest share of the average monthly payment (74.6 percent). However, this was down slightly from 75.8 percent in August 2023. Meanwhile, the share of the monthly payment for the median-priced home comprised of property taxes rose from 13.3 percent to 13.7 percent from July to August.

The payment breakdown varies by metro area due to differences in variables such as tax rates and property insurance premiums. For example, property insurance comprises 12.7 percent of median monthly payments in Miami, almost double the national average, due to higher insurance costs in the region.

For additional graphics and data downloads, please visit HOAM's website HERE.

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