ArcaMax

Housing affordability is going to be a huge topic in both personal finance and politics in the year ahead. It’s not your imagination that housing — whether you own or rent — is taking a bigger bite out of your income. The question is what you — and the government — can or should do about it.

The Wall Street Journal recently examined the soaring home prices in Washington D.C. as the new administration of President Donald Trump took office. Wealthy cabinet members and tech executives are paying prices over $10 million for homes where they can entertain and have access to the seat of power.

Meanwhile, housing valued collectively at more than $100 billion has been destroyed in California wildfires. Some of the homes lost were valued at more than $10 million, and others owned for many years by middle class Americans who will now have to pay current prices to rebuild — assuming they have the insurance.

Owning a home has always been a cornerstone of the American Dream. In the rush to build new homes after World War II, suburban developments and highways and school systems powered the post-war economic revival.

In the 1950s, the average price of a new home was $7,354, which adjusted for inflation would be $93,602 in today’s dollars. But today, the median price of an existing U.S. home is $407,500, according to the National Association of Realtors.

Home prices have not always gone straight up. In most recent memory, amid the mortgage crisis in 2007-2008, the median existing home price in the U.S. fell by a record 12.4% in the fourth quarter of 2008 compared to the same period in 2007, as foreclosures and defaults skyrocketed, and some people simply walked their homes and unaffordable mortgages.

For the record, my columns begged people not to walk away from their homes, even at lowered values. If you had kept paying that mortgage, your home would be worth double today — and you could have refinanced below 4% a few years ago.

It’s not just the price of the home that’s the issue. We all know prices have soared — and not just for the mega-rich. Over the past seven years, home prices have surged by more than 65%. Affordability revolves around the ability to make the necessary monthly payments, including mortgage interest, property taxes and insurance — as a percentage of the average family income.

Despite the Fed’s recent cuts in short-term interest rates by one full percentage point since last September, mortgage rates have moved in the opposite direction — rising more than one percentage point since the Fed started cutting. Fears of future inflation, borrowing demand because of deficits, and just plain economic growth have kept longer-term rates moving higher.

This affordability crisis is accelerating. According to the Realtors, in 2021, when mortgage rates were around 3% and the median home price was around $357,000, it took only 16.9% of the median family’s income to pay for that home. In 2024, it takes 27% of that median family income to afford the median family home.

Or, to put it more specifically, for today’s median priced home (around $410,000) with a 10% down payment, a 30-year fixed rate mortgage for $370,000 would cost you $2,610 per month (including PMI).

A small change in mortgage rates makes a big difference. At the 6% rate available on the same mortgage earlier last year, the monthly payment was $2,304 including PMI — a $300 difference every month.

And those numbers don’t include property taxes and insurance! Does anyone think either of those will decline in the year ahead as insurers recoup the losses of their hurricane and wildfire coverage?

No wonder sales of existing U.S homes fell in 2024 to the lowest level since 1995!

Housing affordability is a problem that confronts buyers and sellers and renters. The market is in a logjam — with those who have low-rate mortgages from a few years ago mostly refusing to sell. Tariffs on imported building materials from Canada will only accentuate pricing problems. And rebuilding demand on both coasts will keep raw materials and labor costs high.

Markets will solve this problem. At some point, builders will be forced to cut prices to liquidate inventories. Or sellers will relent and list their homes, creating more supply. Or builders will keep building at even higher prices until the affordability bubble bursts and transactions take place at more reasonable prices.

The one optimistic outcome is that new, private incentives are created for tiny homes and community solutions to solve the housing problem. We did it in the 1950s, and we can do it again. That’s The Savage Truth.

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(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

©2025 Terry Savage. Distributed by Tribune Content Agency, LLC.