Markets & Economy

Why ‘affordability’ isn’t the seed of the next market slowdown

The current policy puzzle is straightforward: why do we not have more new construction?
  • Affordability is a self-correcting, circular issue in the housing market.
  • At the heart of affordability circularity: If buyers could not afford the prices being paid in any given market area, they would not pay them.
  • The odds are that construction now is slow to recover like everything else after the Great Recession, but will recover. Higher prices are less “affordable” but will encourage more supply.
  • Maybe there is some dysfunction -- credit, regulation, other impediment to development -- but not likely.

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Brace yourselves: Soon, you’ll see assertions that U.S. housing is losing “affordability,” the leading cause of slowing sales asserted by those who have never sold a home, or provided a loan for one. There are two legitimate economic moments when homes become unaffordable, both temporary. First, when the Fed and or inflation force up mortgage rates beyond the ability or willingness of buyers to pay. The subsequent recession always fixes that problem. The second circumstance is related: In recessions, unemployment rises, and the unemployed can’t afford much of anything. Sometimes it takes a long time for jobs to come back, sometimes short; sometimes a lot of jobs lost or a few, but they always come back. [graphiq id="evRBWnjd3db" title="U.S. Housing Affordability Index" width="600" height="608" url="" link="" link_text="U.S. Housing Affordability Index | FindTheHome"] Every other aspect of afforda...