Housing affordability in the United States has reached challenging heights, with echoes of previous decades when the market faced similarly steep conditions. To find historical parallels, one might consider 1981, when mortgage rates soared to 18%, or 2006, which preceded a monumental crash. As we look ahead to 2025 and beyond, the pressing question is how affordability might improve for prospective buyers. While the factors at play are complex, they largely boil down to three key elements: mortgage rates, home prices, and household incomes.
At present, mortgage rates appear stubbornly fixed around 7%, defying expectations of a decline following Federal Reserve rate cuts. Despite hopes that such cuts would alleviate the financial strain, the reality has been the opposite. Since the Fed’s initial rate reduction in mid-September, mortgage rates have climbed by over one percentage point. This unexpected rise reflects shifts in the bond market, where growing inflation and economic growth expectations for 2025 have pushed long-term bond yields higher, dragging mortgage rates along with them.
Given these conditions, it seems unlikely that lower mortgage rates will significantly ease the financial burden on buyers next year. That leaves the second lever of affordability: home prices. Nationally, values remain up by 3-4% year-on-year, presenting a barrier for many potential buyers. However, certain regions are beginning to show signs of cooling. Data from Realtor.com highlights declining median list prices in states like Florida, Tennessee, Texas, Oklahoma, and Colorado, where inventory levels have surged over the past year. This increase in available homes has tempered the market in these areas, though the reductions have been modest and might not yet register as meaningful relief for most buyers.
It’s worth noting that median list price figures don’t account for differences in the size or quality of homes, which can mask underlying trends. Still, these early shifts hint at the possibility of broader price corrections in 2025, particularly across the South and parts of the Mountain West. In contrast, regions such as the Northeast, Midwest, and certain areas of California are likely to maintain relatively stable prices, leaving much of the country without significant price relief.
This brings us to the third factor: wage growth. Robust increases in household incomes could provide a crucial boost to affordability. Median household income in the US grew by an impressive 8% in 2023, though the pace for 2024 is expected to be more subdued. Much of the recent growth may have stemmed from changes in living arrangements, with more households consolidating under one roof. Currently, the typical median household income hovers around $80,000, while the annual cost of homeownership, including mortgage payments, amounts to roughly $34,000. This disparity underscores the affordability challenge, with housing costs consuming 39% of median income on average.
If incomes were to rise to $100,000 within a few years, the cost ratio would decrease to around 34%. While still above the long-term norm of 29%, this shift would represent meaningful progress. Achieving such income growth, however, requires sustained annual increases of 5.5% through 2027—a challenging but not impossible target given current inflationary pressures and robust hourly wage growth. Nevertheless, the timeline for such gains highlights the absence of any quick fix.
A balanced improvement in affordability likely depends on a combination of these factors. For instance, if mortgage rates were to dip to 6.5% by late 2025, alongside stable home prices nationally (with declines in the South) and 5.5% income growth, the cost ratio could drop to approximately 36.5%. While still elevated by historical standards, this would mark an encouraging step forward, potentially bringing more buyers back into the market. However, such progress is likely to unfold gradually over several years, barring any significant economic upheaval that might dramatically lower both prices and rates.
The current landscape offers no immediate solutions but underscores the interplay between mortgage rates, prices, and incomes in shaping the housing market’s trajectory. As 2025 approaches, these dynamics will continue to evolve, shaping the prospects for affordability in ways that may defy historical patterns.
