Inventory, mortgage rates combine for a millennial affordability crisis

History often repeats itself, but millennial homebuyers are facing a few factors making up their own housing affordability crisis.

Housing affordability dropped last fall to its lowest point since September 1985, according to the National Association of Realtors affordability index reported the Wall Street Journal. 

Unlike the mortgage rate crisis that roiled homebuyers in the 1980s, the hopeful homeowners of today will have to contend with the low supply of homes expected to keep prices high.

Existing-home sales last year were at their lowest level since 1995 and have continued at low levels in the first half of 2024, according to the data. And new home sales hit a seven-month low in June. 

Today’s mortgage rates last week hit their lowest level in more than a year, teeing up expectations the Fed will cut interest rates in September. A move in rates give encourage homebuyers, but the market will likely have to contend with tight inventory until next year. 

Home builders built 1.4 million units last year, compared with 1.7 million units in 1985, according to Census Bureau data. Manufactured homes, considered one of the most affordable types of housing, were under 90,000 last year, down from more than 280,000 in 1985.

While today’s lending restrictions after the 2008 financial crisis have made been implemented avoid another foreclosure disaster, it is also an impediment for some potential homeowners to enter the market.

As of Jan. 2021, a family needed an income of $49,152 to afford the median-priced single-family home with a 20 percent down payment, according to NAR’s affordability index. That family today would need an income of $110,544 to make the same purchase.

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Baby boomers were more comfortable with adjustable rates. Over half of conventional single-family mortgages originated in 1985 had adjustable rates, the outlet said according to Federal Housing Finance Agency data. But only 5.6 percent of mortgage originations in the first five months of 2024 were ARMs, according to Intercontinental Exchange data.

 — Christina Previte