There's a 3-part checklist for how housing can become affordable again, economist says

• US housing affordability can come back by 2027 if three criteria are met, a TD economist said.
• Mortgage rates, income growth, and price growth will need to trend in a specific direction.
• The market has become out of reach for many people amid low supply and rising costs.

A return to widespread housing affordability is not out of reach, as long as three criteria are met over the next few years, TD economist Shernette McLeod wrote.

The analyst predicted that national affordability could return by mid-2027, defined by a household's ability to contribute no more than 25% of its income on monthly costs.

For some, that may be a far cry from current realities: the US market has become exceedingly unaffordable in the post-COVID era, with homebuyers navigating both a home supply shortage and high mortgage rates.

McLeod noted that ownership costs have also priced many out: for instance, annual average insurance premiums grew an estimated 25% between 2022 and 2023.

In this context, the NAR housing affordability index has declined 44% since 2019 — at its current level, median-income households are not making enough to meet McLeod's affordability threshold.

"Perhaps the most natural assumption is that a significant drop in home prices commensurate with the run-up during the pandemic would be necessary," McLeod said. "Such a scenario, however, would likely require a US recession and a nationwide spike in job losses accompanied by a swift and sizeable rate-cutting cycle."

Instead, income growth, home price growth, and mortgage rates need to hold to a certain level through the next three years to revive affordability, she wrote.

Mortgage rates will need to decline modestly to a 5% to 5.5% range, which could be on the horizon as the Federal Reserve prepares to lower interest rates.

Given that these rates closely track Fed policy, the weekly 30-year fixed mortgage rate has already slid to 6.35% from prior 7% highs.

McLeod added that home prices would need to grow moderately at a 3% annual rate. The trend might not surface this year, as some analysts expect home price appreciation to reach 5% in 2024.

However, monthly data is starting to show that home price growth is slowing: prices rose 5.4% in June, below the prior month's increase.

Finally, McLeod said that income will need to grow 4.5% yearly, in line with historic norms.