Construction costs reveal just how out of reach homeownership is for Americans

A severe housing shortage has more Americans shopping for new builds, but even newly-built properties don’t offer a solution to the affordability crisis.

According to a new report by Creditnews Research, only 50.1% of U.S. households can afford the construction of a newly-built, move-in ready house, which costs $367,836 as of the end of 2023.

At that rate, households would need a minimum income of $98,854 to purchase the property, assuming a 15% down payment and a 30-year mortgage rate of 6.5%. That’s well above the average household income of around $75,000.

As bad as that sounds, there’s a caveat that makes it even worse.

A “move-in-ready house” includes the foundations of the property, plus exterior finishes, plumbing and electrical, and interior finishes like insulation and drywall—basically all the things that make a home habitable.

But it doesn’t factor in the price of land, permits, builder margins, and closing costs. If these costs are added to the final sales price, even fewer Americans would be able to afford a move-in-ready house.

“This highlights just how big of a disparity exists between what Americans make and how much they have to shell out for a home,” said Sam Bourgi, Senior Analyst at Creditnews Research.

Since the start of the pandemic, the average selling price of a new single-family home has risen by more than 35%, according to data from the St. Louis Fed. Prices were up a whopping 60% between April 2020 and the top of the market in October 2022.

Although home prices have moderated from their peaks, affordability hasn’t improved. In fact, a large share of homeowners are spending well above their means just to keep a roof over their heads.

Housing affordability hits new lows

Depending on how you measure “affordability,” 2023 was perhaps the worst year ever to buy a home. Per Redfin data, just 15.5% of the homes sold last year were considered affordable—the lowest since the real estate listing website began tracking the data a decade ago.

Redfin defined affordability the same way that Creditnews Research did—by calculating whether the typical family would be able to keep monthly housing and mortgage costs at less than 30% of income.

That’s consistent with the guidance put forward by the Department of Housing and Urban Development, which states that Americans are house-poor when they spend more than 30% of their monthly income on their homes.

Using this metric, Creditnews Research estimated in a recent report that roughly one in three American households are house-poor. This figure is as high as 37.2% for homeowners who still have mortgage payments.

New buyers, in particular, are struggling to afford homes due to a combination of elevated mortgage rates and a chronic shortage of real estate across the country. The problem is so bad that more buyers are turning to construction companies to build their new homes.

Despite being expensive, new homes accounted for 12.3% of total home sales last year—the highest on record.

So, if existing properties are too expensive and new builds are also cost-prohibitive, what are people to do?

Waiting for mortgage rates to drop

Conventional wisdom states that homebuyers should wait for mortgage rates to drop before they purchase a property. While that makes sense in theory, there’s a massive hole in that argument.

As Creditnews Research reported, between 1987 and 2023, home prices rose 80% of the time when mortgage rates fell. In fact, it often takes a major crisis—like the Great Recession or Covid—for home prices and mortgage rates to fall together.

“With chronically low housing inventory, any increase in demand caused by lower mortgage rates will likely drive up prices in the limited pool of available houses, potentially offsetting any savings from lower mortgage rates,” said Creditnews Analyst Dwight Cass.

And while mortgage rates are down from their 23-year peak, the decline hasn’t been a straight line. In fact, the average rate on 30-year fixed mortgages is back around 7%, having risen in four of the last five weeks, according to Freddie Mac.

“The recent increase in mortgage rates has the potential to slow the market by disrupting the plans of many buyers, especially in a market where a significant number of consumers are anticipating lower mortgage rates, not higher,” said Jiayi Xu, an economist for Realtor.com.