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Housing prices in the U.S. have been on a steep upward trajectory over the last year and are continuing to climb. Unusual economic conditions, strong demand for homes, and record low inventory have made the residential real estate market highly competitive and sent prices skyrocketing. According to data from the Department of Housing and Urban Development, the average sale price of a home in the U.S. rose nearly 16% between the second quarter of 2020 and second quarter of 2021—one of the greatest year-over-year increases on record.
The rapid appreciation in home values has drawn greater attention to issues around housing affordability. More would-be homebuyers are being priced out of the market in many locations, and the rise in prices extends into the rental market as well. And while builders see an opportunity to expand housing stock, supply chain breakdowns and labor shortages have made it difficult to build quickly.
Housing affordability matters because housing is by far most households’ largest expense. As housing costs increase, families have less available to spend on other items that may also be necessities. The U.S. government defines housing affordability according to the percentage of income spent on housing, setting the threshold for affordability at 30% for the purposes of federal housing programs. But for most people, the 30% standard is just a rule of thumb: some households who spend a lower percentage may still be financially constrained if they have other large regular expenses, such as debt payments.
The good news is that a majority (58.3%) of owner-occupied households currently spend less than 20% of their income on housing, according to the U.S. Census Bureau. However, this leaves more than 40% of homeowners spending above that amount, with more than one in five homeowners spending 30% or higher.