Home Affordability Conundrum

The latest U.S. Housing Confidence Survey finds that two-thirds (66%) of renters in 20 large metro areas are confident, or somewhat confident, that they will be able to afford to own a home in the future. This is encouraging–especially given the lack of real (inflation-adjusted) wage growth in recent years, tight mortgage credit market conditions, and broad consensus that interest rates will be moving higher from historically low levels.

Less encouraging is the affordability challenge facing many would-be sellers of entry-level homes: despite recent gains in home values, millions of them remain underwater. They can’t afford to sell. Thus, in several big cities, eager renters who are confident that they can afford homeownership may have a disappointing shopping experience due to a limited supply of suitable, “entry-level” homes for sale.

“Will you be able to afford to own a home someday?”

% of Renter Households “Confident†or “Somewhat Confident.”

Note that in the majority of metro areas with above-average affordability expectations, the percentage of entry-level homes that remain underwater is elevated and well above the U.S. average. This presents a problem for some renters hoping to take the homeownership plunge soon: the healthy value appreciation needed to enable underwater owners to list their starter homes for sale will lower affordability and risks crushing renter expectations and confidence.