U.S. housing affordability worsened considerably in 2022, driven by expensive home prices and soaring mortgage rates. With the Federal Reserve remaining focused on inflation, a quick recovery from here is unlikely—yet another headwind for the U.S. economy in 2023.

U.S. housing affordability, as measured by the ratio of mortgage payments to disposable household income for a median new home, has deteriorated to levels unseen since 2006. As the majority of U.S. mortgages are fixed, most existing homeowners are not seeing their mortgage payments increase. Yet, deteriorating affordability will certainly discourage new demand.

Housing affordability is driven by mortgage rates, household income, and house prices. The deterioration since the pandemic has been so significant that, in order to revert to pre-COVID levels of affordability, it would require either:

- Mortgage rates to fall 420 basis points, or...
- Household income to rise 64%, or...
- House prices to fall 39%.

Admittedly, these factors are not independent of each other and, in reality, they can move together. As a result, it may not require such exaggerated moves in any single driver to improve affordability. Even so, a recovery is likely to be a very prolonged journey. While quantitative easing in the years following the Great Financial Crisis facilitated a relatively quick recovery in housing affordability, the Fed’s prioritization of its inflation goal today means that a return to easy monetary conditions is highly unlikely this year.

Housing market conditions are usually a leading indicator for the U.S. economy. With high mortgage rates likely to continue squeezing affordability, housing demand and activity will be under pressure, intensifying the economic risks in 2023.