Affordability gap widens as newly constructed home prices hold steady

Nationwide, home prices have been on the rise. But there are signs of a softening market, as buyers slowly gain the edge in negotiations and more homes hit the market, lingering for longer.

One sign of life in the affordability crunch last quarter was new homes. Median prices fell about 1.5 percent in the second quarter from the previous period to $410,800, while the median price for existing homes rose by 6.7 percent to $429,400.

Construction activity for new homes has been up, but permit activity dropped in June, signaling a potential decline in supply down the road as builders’ confidence amid continued economic uncertainty wanes.

As of last quarter, a homebuyer earning the median income of $104,200 would need to spend 36 percent of their pre-tax earnings on the mortgage for a median-priced, newly built home, according to data from the National Association of Home Builders, which assumed an average 30-year mortgage rate of 6.88 percent. That’s the same share as the quarter before and six percentage points lower year over year.

Low-income homeowners, defined in the index as those whose salaries are half the median income, would need to spend 71 percent of their earnings on such mortgages.

Meanwhile, borrowers earning the median income would need to spend 37 percent of their earnings on mortgages for a median-priced house — a two percentage-point increase from the previous quarter.

The burden is worse for low-income households, which need to spend nearly three-quarters of their income on mortgage payments for a typical, existing home. That share is up four percentage points from the quarter before but down five percentage points year over year.

California has three of the top six most cost-burdened markets in the U.S. The top spot went to the San Jose metropolitan region, where 93 percent of a typical family’s earnings would be needed to cover a mortgage for an existing home. 

The least cost-burdened market was Decatur, Illinois. A typical homeowner there would need to spend 17 percent of their annual income on their mortgage.