What made housing less affordable in Q3?

Low mortgage rates and swelling demand saw housing affordability decline in the third quarter, according to the National Association of Home Builders (NAHB)

In Q3 2020, the NAHB/Wells Fargo Housing Opportunity Index (HOI) declined 1.3% to its lowest reading since the fourth quarter of 2018, a sentiment NAHB Chairman Chuck Fowke said is likely due to tight inventory and rising lumber costs.

“Though low mortgage rates and favorable demographics have helped spur demand, a lack of inventory exacerbated by supply chain issues stemming from the COVID-19 pandemic have contributed to rising home prices,” said Fowke. “Surging lumber prices also peaked more than 170% above mid-April levels in September, raising building costs. However, lumber prices are now trending lower, which is good news for prospective homebuyers.”

Overall, 58.3% of new and existing homes sold in the third quarter were affordable to families earning an adjusted U.S. median income of $72,900. This is down from the 59.6% of homes sold in Q2 2020 that were affordable to median-income earners.

NAHB’s report also showed that the national median home price rose to an all-time high of $313,000, breaking the previous record-high of $300,000 set in the second quarter of this year. Meanwhile, average mortgage rates were 29 basis points lower in Q3, down to a record low of 3.05% from 3.34% in Q2.

Lansing-East Lansing, Mich. (89.4%), and Scranton-Wilkes Barre-Hazleton, Pa. (89.4%), were tied as the nation’s most affordable major housing markets, defined as a metro with a population of at least 500,000.

San Francisco-Redwood City-South San Francisco, Calif., was the least affordable major housing market, with just 9% of homes were affordable to families earning the area’s median income of $130,900.

Other California markets among the least affordable included Los Angeles-Long Beach-Glendale; Anaheim-Santa Ana-Irvine; San Diego-Carlsbad; and San Jose-Sunnyvale-Santa Clara.

“A six-month supply of homes is considered a normal supply and demand balance, and this figure has been running below a four-month rate since July, putting upward pressure on home prices,” said NAHB Chief Economist Robert Dietz. “As builders look to ramp up production, the work-at-home trend is contributing to a suburban shift, meaning that buyers have additional market power to shop for affordable markets.”