Housing affordability worse across the US, but a correction is coming 

While a correction may be coming, it could take some time before home affordability returns to more normal levels.

In a report released by ATTOM at the end of September, nearly every U.S. county studied — 99%, up from 69% a year prior — had a lower affordability index in the third quarter of 2022 compared to historical averages. Only seven of the 581 counties analyzed showed better-than-average affordability.

Higher interest rates, combined with home prices that peaked earlier this year, were key reasons for the low affordability index numbers. 

"While home prices have declined a bit quarter-over-quarter, they're still higher than they were a year ago, and interest rates have essentially doubled," said Rick Sharga, executive vice president of market intelligence at ATTOM. "Many prospective homebuyers simply can't afford the home they hoped to buy, and in many cases no longer qualify for the mortgage they'd need."

The other key factor: wages, which haven't been keeping up. Home appreciation has outpaced annualized wage growth in 84% of the counties in the report. 

Sharga said homes aren't likely to become more affordable overnight, but home values may normalize. Instead of appreciating 15-20% a year — a rise fueled by historically low interest rates throughout 2020 and 2021 — home values may increase by a more modest 2-3% annually.

"That will give buyers a chance to catch up a bit, but it will take time," Sharga said in an email.

Although some economists think home values may decline in the next year, it would take a sharp increase in inventory for home values to fall dramatically, said Nicole Bachaud, a senior economist at Zillow, in an Oct. 20 report. That's an unlikely outcome given the slowing home construction market, reluctant sellers and pent-up housing demand. 

Buyers "may need to change their expectations in order to remain competitive in this market," Bachaud said in the report.

In looking at past trends during similar housing cycles, Sharga said buyers adjusted to new market conditions by looking for smaller homes, older homes or homes away from city centers to find something that fit their budget.

"So 'affordability' becomes a bit more about choosing a less expensive property than about property values declining," Sharga said, adding that it could take 12-18 months of slower sales for prices to stabilize.

Even as affordability improves, it could be uneven, varying by market and price tier. Sharga expects markets that were overheated in recent years, like Las Vegas or Boise, Idaho, to have deeper price corrections than areas where appreciation wasn't as steep. 

Higher-end homes may see price corrections first, said Sharga, because demand is more limited. At the lower price tiers — particularly among homes most affordable to first-time buyers — inventory remains low, which is likely to keep prices elevated.

"A lot of this still comes down to supply and demand, and inventory levels aren't really increasing very much," Sharga said.

The three least affordable counties in the third quarter, with affordability indexes below 50, were located in the Southeast: Clayton and Newton counties near Atlanta, and Rutherford county near Nashville. An index of 100 or more is considered affordable for a median income family.

Among the handful of counties that were more affordable in Q3 2022 compared to historical averages are New York county (Manhattan) and San Francisco county, with affordability indexes of 105 and 125, respectively. Those metros also rank first (San Francisco) and third (New York) among cities with the highest outflow of residents — meaning more people are leaving the area than moving to it — according to a September Redfin report.