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Economic Research: The American Dream May No Longer Be In Reach

There is a cold wind blowing in the U.S. and it is not the weather or the potential for a recession. A freeze has started to set in on what is quite often considered the American Dream: home ownership.

It now takes households over twice as many years to save for a down payment as it took them before the pandemic took hold. By fourth-quarter 2022, it will take a prospective homeowner 11.3 years to save for a 10% down payment and 22.6 years to save for a 20% down payment--both over twice their pre-pandemic rates of five and 10 years, respectively.

Following the National Association of Realtors (NAR), we use 25% of household income as a threshold of mortgage affordability (see appendix for details). In other words, affordable mortgage payments should not exceed 25% of a household's income. Mortgage spending that is too high can squeeze resources for other essential spending and even lead to defaults on home loans. Affordability estimates from 2021 to 2025 rely on our recent economic forecasts (see "Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent," June 27, 2022).

According to our calculations, given a 10% down payment in line with NAR assumptions, we found that the share of a typical first-time homebuyers' income spent on a 30-year mortgage for a starter home fell to an average of 20.3% from 2010 to 2019 from 28.5% in second-quarter 2006 (the peak was 45% in fourth-quarter 1981). This measure dropped to 17.4% at the height of the pandemic in second-quarter 2020, its lowest level since first-quarter 1973.

As a kicker, we found that mortgage payments as a share of income for a middle-income homebuyer already topped the affordability threshold of 25%, reaching 26.7% in first-quarter 2022, according to our calculations. We expect it to worsen to 31.4% by fourth-quarter 2022 and remain well above the affordability threshold through 2025, leaving 60% of U.S. households out of the market.

Looking ahead, we expect high prices, combined with the steeper path of monetary policy rates, will likely bring housing affordability for a typical first-time homebuyer with a 10% down payment to 27.8% by fourth-quarter 2022. (Given data for first-time homebuyers comes with a significant lag, we use a proxy based on Census data, see methodology in the appendix). That's the worst rate for the typical first-time homebuyer since first-quarter 2007, as the financial crisis took hold. And the situation will be much worse for some. The impact, which varies among income brackets, has already pushed out of the market households earning at the bottom 40% because of disproportionately heavier cost burdens, with far fewer affordable homes available for sale. This will keep them from owning a home even longer. While we don't address rental costs in this report, according to the State of The Nation's Housing 2022 report by the Joint Center of Housing Studies of Harvard University, affordability concerns extend to rentals as well. The report noted that "strong demand and low vacancy rates pushed apartment rents up rapidly over the past year" and "despite the economic recovery and resurgence in employment, many renter households remained in financial straits in early 2022."

High home purchase prices don't necessarily mean that homes have become unaffordable, but after over a decade of relatively benign home purchase conditions, our analysis of housing market conditions shows affordability has worsened in recent years. Mortgage payments from 2010-2019 for a typical U.S. first-time homebuyer, a widely used gauge of home affordability, remained comfortably under 25% of their income. But that was before the pandemic set in. After a big, but brief, improvement in affordability conditions in second-quarter 2020, home prices began their ascent higher, as extremely low interest rates, a strong stock market, and a desire to leave crowded virus-prone cities encouraged many households to buy their first, second, or even third homes. The slowdown in homes for sale from 2010 through 2022 made conditions worse for the prospective buyer.


Economic Growth Is Slowing With Recession Risk Rising

Despite the recent housing boom and slowing housing supply since 2010, mortgage payments have remained under 25% of the average first-time homebuyer's income. Generous government transfers, low interest rates, and a temporary decline in home prices made mortgages even more affordable in 2020.

We expect tighter monetary policy, a faster increase in home prices relative to household income, and declining saving rates as inflation depletes household nest eggs will continue to worsen housing affordability conditions dramatically this year and the next. Now, with a more hawkish Fed, we expect our measure of affordability has risen to 27.3% in the second quarter of 2022, the highest level since second-quarter 2006, and will remain above its 25% affordability cut of through 2025. With affordable options to buy a home out of reach, housing activity will weaken this year and the next, and with it, the economic activity that revolves around the housing market.

The rule of thumb is that for every home built, two jobs are created--in construction, but also in businesses that revolve around that home, the mortgage banker who makes the loan, manufacturers and retailers who make and sell the furniture and appliances, as well as the people who ship the products to their new homes. When housing contracts, so do these surrounding businesses, dampening economic activity further down the supply chain.

According to our March downside scenario forecast, a more aggressive Fed policy to combat unbridled inflation would have slowed GDP growth considerably next year to just 1.4%, while the unemployment rate would be near 4.0%. We worried that residential construction would contract by 0.8% and 0.4%, respectively, in 2022 and 2023.

Unfortunately, our new base case is more pessimistic. After falling well behind the curve, a much more aggressive Fed policy is now the straw that broke the housing camel's back. After peaking at 1.72 million in first-quarter 2022, we expect housing starts to fall by 11.2% for the remainder of 2022 and further in the following year, reaching bottom at 1.43 million units in second-quarter 2024. Also peaking in first-quarter 2022, residential construction is expected to contract each quarter through first-quarter 2023, with 2022 and 2023 falling by 4.6% and 2.1%, respectively. Our baseline now expects GDP growth for 2023 to come in at 1.6% (previously 2.1%), with the unemployment rate to top 4.3% by the end of 2023 and reach 5.0% by the end of 2025 (previously holding at 3.5% in our March baseline).

As we inch toward potential recession, we expect the Fed's stronger action will slow hiring and raise unemployment. Under such a scenario, the "cure" for the U.S. economy and jobs market may feel worse than the disease. While our baseline signals a low-growth recession, the chances of a contraction (a technical recession) are rising. We assess recession risk at 40% (35%-45% band), reflecting a larger spike in prices with even more aggressive Fed policy heading into 2023, and with risks closer to the top of the range as the U.S. economy heads into 2023. This reflects continued supply disruptions and a larger spike in prices leading to further Fed action in 2023 that will damage household purchasing power, causing the housing market to worsen. As households shut their pocketbooks, businesses that built up inventory to meet surging demand will be left with full shelves. The Fed will ultimately get its wish, and businesses will be forced to sell at a discount, bringing down prices (and hurting profit margins).

Fortunately, there is some consolation despite trying times. Unlike the Great Recession--and ironically "helped" by shortages from supply chain disruptions--homebuilders saw nowhere near the buildup they carried in 2006. Though peaking at 1.72 million units in first-quarter 2022, housing starts are well below the 2.3 million rate in January 2006 before the housing market collapsed. Private-sector balance sheets are also in relatively healthy territory today compared with 2006, providing more cushion for now higher monthly mortgage payments. Last but not least, relative to 2006, many more monthly mortgage payments today are locked at fixed, not adjustable, rate mortgages (ARMs), and so less vulnerable to a jump in mortgage payments this time around. According to Corelogic, the ARM share of the dollar volume of mortgage originations fell from almost 45% of the total in mid-2005 to just 2% in mid-2009 and is now fluctuating between 8% and 18% of mortgage originations (1).

Down Payments: Households Need More Than A Decade To Save

Although mortgage payments usually top expenditures for a homebuyer, the decision to purchase a home may affect a family's quality of life well before they enter the housing market. Thus, we also calculated the amount of time a first-time homebuyer needs to save for both a 10% and a 20% down payment for a starter home, assuming a saving rate at the national average. Our analysis does not consider how changes in the stock market may affect affordability, but one can easily assume that the huge plunge in the stock market to bear-market territory in May has weakened a young adult's ability to get financial support from parents or other family members when saving for a home purchase.

Like the case with mortgage affordability, it was much faster for a typical first-time homebuyer to get ready for home purchases after the financial crisis than between 2000 and 2007. Specifically, from 2010 to 2019, it took 12 years for a typical first-time homebuyer to save for a 20% down payment for a starter home (see chart 1). In 2005 before the financial crisis, the amount of time was 35 years. It came down around 2010, bottoming to nine years in fourth-quarter 2012 and remaining relatively stable in the past decade. Of course, families can save for lower down payments. If a first-time homebuyer plans to save for a 10% down payment, using the National Association of Realtors' (NAR) affordability assumptions, from 2010 to 2019 it took around six years to accumulate enough savings to buy the home. Before the financial crisis, it took 17.8 years in third-quarter 2005.

According to our estimates, the number of years to save is set to rise above pre-pandemic levels in the four years, from 2021 to 2025, due to tighter monetary policy, a faster increase in home prices relative to household income from first-quarter 2022 to second-quarter 2023, and a lower-than-pre-pandemic saving rate persisting until the end of 2023 as higher inflation forces households to dip into savings to make ends meet (see chart 2).

Chart 1


Chart 2


For Low-Income Households, Homes Are Already Unaffordable

In recent years, affordability worsened for all households, but particularly for those at the lower end of the income spectrum, as home prices climbed further out of their price range. Now, worsening home affordability has likely pushed the average household, or the middle-fifth income bracket, out of the affordable range as soon as first-quarter 2022, according to our calculations. For those in that bracket and lower, about 60% of potential homebuyers, the ability to buy a home is no longer an affordable option.

The situation of down payment affordability is similar. Between 2010 to 2019, while the middle-fifth bracket needs to save for seven years for a 10% down payment or 14 years for 20%, those in the first- and second-lowest fifth income bracket must save for much longer (see charts 4-5). The disproportionately heavier cost burdens carried by lower-income families reflects the considerable income inequality among U.S. households.

While it seems that homes were relatively more affordable from 2010 through 2021 after the financial crisis for a typical first-time homebuyer (who saved for six years for a 10% down payment and spent 20% of income on mortgage payments on average afterward), the situation varies among families in different income brackets.

Between 2010 and 2019, as house prices climbed higher, 40% of U.S. households with the lowest income found a typical mortgage for a starter home unaffordable, according to our analysis. We see that mortgage payments as a share of income were higher than 25% for the first- and second-lowest quintile groups of household income (see chart 3). Buying a home was almost impossible for such families, with those in the second-lowest quintile having to spend 39.5% of their income on mortgage payments and those in the first-lowest having to spend more than 100% of their family income. The pandemic brought families in the second quintile some relief, with mortgage payments relative to their income dropping to 33% in first-quarter 2021, the most affordable conditions since fourth-quarter 1972.

Chart 3


Chart 4


Chart 5


How Homes Went From Affordable--To Not

The start of the home buying season, between April and June, has been frosty this year. With home prices at 35-year highs and the Federal Reserve's interest rate rocket soaring higher, the buying season had a cold open. For lower-income first-time homebuyers, higher prices have frozen them out of the market.

According to our calculations, housing affordability improved after the financial crisis 2007-2009. The sharp decline of home prices after the housing bubble burst, triggering the crisis, and the incredibly low interest rates in the 2010s made housing more affordable to first-time homebuyers despite the previous slowdown in home supply.

Specifically, from 2010 to 2019, with interest rates at the lowest levels since 1972, first-time homebuyers spent only 20% of income on mortgage payments. As down payments generally take up about 20% or less of the home value, mortgage payments become the major type of spending faced by households.

Generous government transfers, low interest rates, and the decline in home prices during the first wave of COVID-19 made mortgages even more affordable at the start of the pandemic in 2020. Our affordability measure sank well under the 25% threshold to its lowest--most affordable--rate in 48 years.

That didn't last long. Huge demand amid limited housing supply likely pushed up the ratio of the mortgage payment to household income for a typical first-time homebuyer to just under the 25% threshold in first-quarter 2022, according to our estimates. We expect the affordability measure will have topped 25% in second-quarter 2022. In other words, we think the typical U.S. first-time buyer now finds that owning a home is unaffordable.

Stimulated by stronger household balance sheets, low interest rates, a jump in demand during the pandemic, and fewer houses for sale, home prices have surged since the second half of 2020. Indeed, the S&P/Case-Shiller U.S. National Home Price Index posted a record high in March 2022 at 20.6% year-over-year growth versus March 2021. That's quadruple the annual average 5% growth rate from 2015 to 2019.

As home prices climbed higher through first-quarter 2022, and the Fed started to aggressively raise rates, affordability worsened. While year-over-year home price gains reached levels not seen since 1987, mortgage payments as a share of household income, on average, were still below the 25% threshold of affordability through first-quarter 2022--but barely. When we assume a 20% down payment, we found that the share fell to an average of 18.0% from 2010 to 2019 from 23.8% in 2006.

This doesn't consider the impact higher interest rates will have on monthly mortgage payments in the future. Fortunately, for those households who already bought a home, more mortgages are fixed rate than adjustable rate, so they have less exposure to climbing rates in the future. But prospective homeowners will be vulnerable to higher monthly payments.

The other big factor behind the affordability crunch is a more hawkish Fed, which has already pushed mortgage rates up to 5.18% in the second quarter of 2022--a 13-year high. We forecast a climb to 5.42% by the end of 2022.

Chart 6


Chart 7


Priced Out Of Homes

Clearly, the steeper path for the Fed's policy rate is going to contain the important economic activity of homebuying by making mortgage payments more expensive for a large segment of the population. That said, there are a lot of bricks, sticks, and cement in the way of affordable home prices: the slowdown in home supply after the financial crisis, supply chain constraints limiting new home construction, and the recent surge in home demand stimulated by favorable macroeconomic conditions and the pandemic-driven need to move away from crowded cities.

It's good to note that affordability usually stabilizes after three years of worsening, just as is seen in our analysis. That's because a housing boom followed by lingering high home prices and a gradual decline in saving rates are common phenomenon observed during the expansion stage of business cycles.

However, first-time homebuyers are a particularly vulnerable group, and they are hit hardest right now when it comes to affording a home. They are generally in the early stages of careers and wealth accumulation while also often starting to build a family, and they therefore have a stronger desire for housing but are more price-sensitive than other homebuyers. They also seek less expensive "starter" homes, which eventually allows those sellers to move up the housing market and buy more expensive homes. Our analysis shows that this group is finding the market much less affordable and that lower-income groups have probably already been priced out. This economic engine has stalled.

Appendix 1: Housing Supply Has Already Dried Up

The runup in home prices before the pandemic was a simple case of no supply--supply growth slowed after the 2008 global financial crisis. For new single-family houses, monthly supply hovered around 5.7 months from 2010 to 2019, a notch lower than the historical average of 6.0 months since 1963 (see chart 8). Then, monthly supply temporarily touched a historical low of 3.3 months in August 2020. In other words, it would take only 3.3 months to sell all available new single-family houses.

Existing home supply, which accounts for an average of 84% of the overall housing market from 1968 onwards, contracted even more sharply. From 2010 to 2019, the monthly supply of existing single-family homes dropped to only three months in December 2019 from 11.3 months in July 2010. The monthly supply of existing single-family homes has been stuck at around two months since 2022--the lowest level since 1983.

A slowdown in home supply since the financial crisis is also evident in the growth gap between housing and household formation (see chart 9). Before the financial crisis, the growth of housing units was mostly faster than household formation. After the financial crisis, both housing units and the number of households grew at a slower pace, but the former was almost always slower than the latter. That left the total number of housing units, occupied or vacant, only 10% more than the number of households from 2010 to 2019.

The pandemic-driven surge in demand, as people bought homes away from crowded cities, aided by record-low interest rates, meant even more demand for the few homes available for sale. New home building, constrained by pandemic-driven supply constraints, meant even fewer homes available for sale.

Chart 8


Chart 9


Appendix 2: How We Calculate Housing Affordability

First-time homebuyers' income

According to the Consumer Financial Protection Bureau, the median age of first-time homebuyers has been between 30 to 32 since 2000 (2). Using an NAR estimate of the share of first-time homebuyer weights by age group (3), we calculated a weighted average of the median income of household groups whose householders' ages are between 25 to 34 and 35 to 44, to estimate the income of a typical first-time homebuyer. It's possible that first-time homebuyers were younger before 2000.

The income data of different household groups sorted by age of householder come from the Current Population Survey (Historical Income Tables: Households) by the U.S. Census Bureau. We also ran our calculations using just the median income of household groups whose householders' ages are between 25 to 34. Not surprisingly, we found that, with a lower median household income, home buying affordability worsened for this younger age group.

The data by sorted by income bracket came from the Current Population Survey (Historical Income Tables: Households) by the U.S. Census Bureau (4).

Household income forecasts

Since the latest version of the Current Population Survey is for 2020 at the time of this report, from 2021 onwards, household income--both first-time homebuyer's income and income of households from each income bracket--is assumed to grow at the same rate as disposable personal income grows, which is released by U.S. Bureau of Economic Analysis.

Measuring housing affordability

There are no standard measures of housing affordability, but a popular way is comparing spending on housing to household income. For instances, the National Association of Realtors uses 25% of a homebuyer's income as a threshold of affordability, meaning that any families spending more than 25% of their income on housing may find housing unaffordable. Similarly, U.S. Department of Housing and Urban Development uses 30% of a family's adjusted income (gross income less allowable deductions) to calculate rent subsidies: It offers rent assistance to eligible families so that their spending on housing won't exceed 30% of their adjusted income.

In our analysis, to measure affordability, we calculate monthly mortgage spending as a percentage of a household's income, which is collected by the U.S. Census Bureau. A household spending more than 25% of their income on mortgage payments may find housing unaffordable. We assume that a household pays a 10% down payment when buying a starter home, which is assumed to be worth 85% of the median home price of that period. Original fees and discount points, as well as extra expenses on private mortgage insurance, are all included in the monthly mortgage payments. We referred to how the National Association of Realtors computes its First-time Homebuyer Affordability Index (5).

We later assume that a household pays a 20% down payment and calculate mortgage spending as a percentage of a household's income. As before, we expect that a household spending more than 25% of their income on mortgage payments may find housing unaffordable.

Number of years to save for down payments

We assume that families save at the national personal saving rate released by the U.S. Bureau of Economic Analysis, although a family preparing for home purchases can choose to save at a higher rate, pay lower down payments, and also use any income coming from holding or disposal of assets. If families rely on other income sources, it may take less time for them to save.

We also assume that home prices are fixed at the levels in the period when we calculate the number of years to save for that period. In reality, however, if home prices grow faster than family income, it may take more time for families to save.

The forecasts of personal saving rate, personal disposable income, Census home price index, and mortgage rates beyond 2021 are from S&P Global Ratings Economics June 2022 economic outlook titled "Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent."

Writer: Rose Marie Burke.

Related Research


(1) Is the Adjustable-Rate Mortgage Making a Comeback?, April 29, 2022

(2) Market Snapshot: First-time Homebuyers, Consumer Financial Protection Bureau, March 2020

(3) First-Time Homebuyers, 2022 NAR Home Buyer and Seller Generational Trends National Association of Realtors, March 2022


(5) Methodology: Housing Affordability Index, National Association of Realtors

The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

North American Chief Economist:Beth Ann Bovino, New York + 1 (212) 438 1652;
Contributor:Shuyang Wu, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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