Housing Affordability Hits a 40-Year Low — and the Middle Class Is Being Priced Out Permanently
Published: August 5, 2025 | By Mariusz Kurylo
The National Association of Realtors' Housing Affordability Index — a measure that tracks whether a family earning the median household income can qualify for a mortgage on a median-priced home — fell to its lowest level since 1985 in mid-2025, reaching a point that economists describe without exaggeration as a generational housing crisis. The index, which registers 100 when a median-income family has exactly enough income to qualify for a mortgage on a median-priced home, dropped to approximately 83 in the second quarter of 2025, according to NAR data reported by Bloomberg. The last time the index was this low, Ronald Reagan was in his second term and the 30-year mortgage rate was above 12%.
The arithmetic is stark. According to NAR and Bloomberg calculations, the monthly payment on a median-priced U.S. home — approximately $425,000 in mid-2025 — with a conventional 30-year mortgage at 6.8% required approximately $2,780 per month before taxes and insurance. To qualify for that payment under standard mortgage underwriting guidelines (a 28% front-end debt-to-income ratio), a borrower needed gross income of approximately $119,000 annually. The median U.S. household income was approximately $82,000. The gap between what buyers needed to earn and what they actually earned was the widest since the late 1970s, when a different set of forces — double-digit mortgage rates rather than elevated home prices — produced a similarly unaffordable market.
The consequence was playing out in real time across the housing market. First-time buyer share of existing home purchases fell to approximately 24% in mid-2025 — the lowest in NAR's recorded history, which dates to 1981. The homeownership rate for adults under 35 dropped to approximately 37%, a level not seen since the early 1990s and a reversal of the ownership society that had been a stated goal of housing policy for decades.
The Dual Driver: High Prices and High Rates
Unlike most prior affordability crises, which were driven primarily by one variable (soaring rates in the late 1970s, soaring prices in the mid-2000s bubble), the 2025 affordability crisis was powered by both simultaneously. The Wall Street Journal characterized it as "the worst of both worlds": home prices that never fully corrected after the pandemic-era boom remained elevated at levels that assumed the return of near-zero interest rates that, by 2025, looked permanently behind us.
Median home prices nationally had risen approximately 47% from their pre-pandemic levels of early 2020 through their peak in mid-2022. The modest correction of 2022–2023 — roughly 8–12% nationally from peak, according to Case-Shiller data compiled by Bloomberg — had been followed by renewed price stagnation at still-elevated levels. There was no large inventory of distressed sellers to force meaningful price reductions; existing homeowners with 2–3% fixed-rate mortgages had enormous financial incentive to stay put rather than sell into a market where any replacement purchase would be financed at 6.5–7% rates.
This "lock-in effect" was documented extensively by researchers at the Federal Reserve Bank of San Francisco, whose working paper on the topic was cited by Reuters and CNBC. The Fed researchers estimated that approximately 60% of existing mortgages in mid-2025 carried rates below 4%, and approximately 25% carried rates below 3%. For a homeowner with a $300,000 mortgage balance at 2.75%, the monthly payment was approximately $1,225. Trading that mortgage for a new $425,000 loan at 6.8% meant a payment of $2,780 — more than double. The financial penalty for moving was so severe that millions of homeowners simply did not, artificially restraining the inventory available for purchase.
Geographic Breakdown: Who Is Most Locked Out
The affordability crisis was not uniform across the country. Bloomberg's analysis of affordability by metropolitan area showed a range from genuinely accessible (certain Midwest and South Central markets like Cleveland, Memphis, and Oklahoma City, where the affordability index remained above 100) to deeply inaccessible (Los Angeles, where the index had fallen below 40, meaning a median-income family could afford only 40% of what was needed to purchase a median-priced home).
The markets that had seen the most dramatic affordability deterioration were those that experienced both pandemic-era price booms and subsequent rate increases without price corrections: Austin, Texas (median price up 65% from 2020, affordability index in the mid-60s), Phoenix, Arizona (up 58% with minimal correction), and Boise, Idaho (up 72%, the poster child of pandemic migration overheating).
CNBC reported that several markets that had long served as relatively affordable "gateway" cities for buyers priced out of the major coastal metros — Raleigh, Nashville, Charlotte, Salt Lake City — had also seen affordability deteriorate sharply as the pandemic migration wave pushed up prices and rate increases hit buyers. The affordable fallback markets were no longer affordable.
What Income Is Actually Required — and Who Has It
The income required to purchase a median-priced home in various U.S. metropolitan areas, calculated by Zillow Research and reported by Bloomberg, told a story of a housing market increasingly accessible only to upper-middle-class and affluent buyers. In the San Jose, California metro area, the required income to afford a median-priced home exceeded $350,000 annually. In San Francisco, it exceeded $275,000. In Los Angeles and San Diego, it exceeded $175,000.
Even in more affordable markets, the income requirements had risen dramatically. In Denver, the required income had crossed $120,000; in Nashville, $100,000; in Tampa, $90,000. According to Census Bureau data cited by Reuters, the share of U.S. households earning above $100,000 was approximately 34% — meaning that in market after market, a clear majority of households were priced out of median-priced homeownership.
The implication, increasingly noted by economists, was that homeownership was transitioning from a broad middle-class norm to a privilege associated with specific demographics: those who already owned homes and built equity during the appreciation cycle, those who received significant family financial assistance for down payments, and higher-income professionals in the top income quartile.
The Long-Term Wealth Implications
Homeownership has historically been the primary wealth-building mechanism for American middle-class families. Federal Reserve data on household wealth distribution shows that for families in the middle three income quintiles, home equity represents the majority of their total net worth — more than retirement accounts, financial assets, and other assets combined. A housing market that prices out the middle class is therefore also a wealth creation mechanism that is failing to function for the majority of Americans.
Financial Times economists noted that the affordability crisis, if sustained, would likely widen wealth inequality between homeowners and renters in ways that had significant macroeconomic and social implications. A renter household building no equity over a decade while paying rising rents would accumulate far less wealth than a comparable household that had managed to purchase in 2020 and benefited from appreciation.
The political pressure that the affordability crisis was generating — from both parties, albeit with different proposed solutions — reflected the growing recognition that housing access had become one of the most consequential economic issues of the mid-2020s. Whether that political pressure would translate into policy solutions meaningful enough to bend the affordability curve remained deeply uncertain as of mid-2025.
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Sources: Bloomberg, Reuters, The Wall Street Journal, Zillow Research, National Association of Realtors, CNBC
Disclaimer: This article is for informational and educational purposes only. It does not constitute financial, legal, or investment advice.