High mortgage rates have made home buying unaffordable for many people. Ilya Novellaj/Bloomberg via Getty Images

There is one undeniable fact about the US housing market. It is not affordable for the vast majority of potential home buyers.

Buying a home hasn’t been cheap in decades, if ever, but the pandemic housing boom has kicked off a surge in prices as remote and hybrid work expands the map for millions of Americans — many of whom are millennials entering prime homebuying age. Zoom towns boomed, and prices followed suit.

But 2022 shocked many under 40s, with mortgage rates rising from the 3% range to more than 7% in the blink of an eye, yet decades of construction shortages have kept rates on the floor. Now one housing industry executive has put a number on just how bad the situation is.

With mortgage rates at a multi-decade high of 7.49%, Andy Walden, vice president of enterprise research at ICE Mortgage Technology, did some math. Walden was vice president of data and analytics for years at real estate data company Black Knight, before it was recently acquired by ICE, and knows the mortgage market inside and out, leading the creation of a monthly mortgage monitor that breaks down trends in housing finance. He believes that income in the United States would have to rise by a whopping 55% for the housing market to become affordable.

“If you look at home affordability itself and what it would take for the market to normalize today,” he told CNBC’s Kelly Evans. exchange, “It’s a 35% correction in price, or a 4% drop [mortgage] “Interest rates, or 55% income growth, a combination of that.”

But just imagine that home prices drop by 35% or that your manager gives you a 55% raise. Not likely, right? “We’re talking about these huge movements,” Walden said. “None of it is going to happen in a vacuum. None of these individual factors are going to make this move.”

Other housing industry experts share Walden’s view. In other words, don’t hold your breath for mortgage rates or home prices to drop anytime soon.

“Unlike at the beginning of the millennium, today’s home prices are rising along with mortgage rates, primarily due to lower inventory,” Sam Khater, chief economist at Freddie Mac, said in a statement. These headwinds prompt buyers and sellers alike to wait for better conditions.

For reference, Americans earn an average of $4,600 per month, according to August 2023 data from the CEIC. However, a quarter of recent buyers will pay at least $3,000 in average monthly principal and interest payments on a 30-year fixed-rate loan in July 2023, according to Black Knight. For some buyers, that’s the difference of $800 to $1,000 more per month on their mortgage payments.

Additionally, some homeowners may spend more than 60% of their paycheck on their mortgage alone. As a result, fewer hopeful homebuyers are hitting the market.

“Demand has bottomed out during the pandemic over the last three weeks, and it’s definitely kind of constrained the market and affordability is at a 40-year low,” Walden told CNBC. “You’re seeing this constrained demand and more constraints expected from these higher rates.”

He continued: “But the big question when it comes to how the market will react is what will inventory do? Are we going to see any kind of inventory building here over the next few months?” he wonders. “If so, yes, it could bring prices down. If not, you will see this dilemma play out in the market.

While it’s easier to understand that high home prices continue to keep potential buyers away from the housing market, the more difficult problem is the lack of inventory. There has been a very slight increase in new listing inventory, according to Zillow, but it’s unlikely to be enough to ease the pressure on new buyers. Between July and August, new listings increased by 4%.

This shows some signs of recovery compared to a decline of 12.7% y/y versus a decline of 25.6% y/y in July. This uptick in new listings in no way indicates that the inventory “drought” is behind us, says Jeff Tucker, Zillow’s chief economist.

“This is by no means a mine or glut of new listings,” he wrote in a report issued in late September.

Walden calls it “above seasonal average inventory growth,” and it’s something to watch over the next few months.

“We will be monitoring this inventory data closely,” he said. “This will really tell us where home prices are going late this year.”