Study reveals housing affordability would have declined without Federal Reserve tightening efforts

Housing affordability in the United States faced significant challenges in 2022 and 2023, with the Federal Reserve's decision to raise interest rates having a major impact. According to a study conducted by the Federal Reserve Bank of Dallas, if interest rates had remained unchanged, the situation would have been even worse. When the Federal Reserve began tightening its policies in March 2022 to tackle inflation, housing affordability was hit hard as mortgage payments increased, making it harder for potential homebuyers to enter the market.

The National Association of Realtors' housing affordability index dropped by almost 30% since December 2021, reaching levels not seen since the late 1980s. Despite the challenges, many current homeowners have not been significantly affected by the rise in mortgage rates. As of September 2023, the average homeowner was paying an interest rate of 3.

9%, much lower than the 6.82% average rate for a 30-year fixed-rate mortgage as of April 4, 2024. The study also noted that the number of homebuyers is relatively small compared to the total population of homeowners.

In response to the affordability challenges, homebuilders have started to adjust, with some lowering prices or offering incentives on mortgage rates, even if it impacts their profit margins. The rise in housing prices due to low supply has begun to slow down, with new listings increasing and home price growth returning to pre-pandemic levels. Researchers Alexander Richter and Xiaoqing Zhou from the Dallas Fed found that housing affordability would have deteriorated even if mortgage rates had not increased, given the significant surge in house prices post-pandemic.

The study highlighted the complex relationship between mortgage rates, housing prices, and affordability, challenging conventional wisdom. The authors emphasized that when monetary policy is accommodative, mortgage rates tend to decrease while house prices increase due to heightened demand, creating a unique dynamic that affects affordability in unexpected ways. Despite the challenges, the housing market is showing signs of adapting to the new reality, with changes being made to address affordability concerns.