Flash Insights: Addressing US housing affordability—a targeted financing approach

What “affordability” means in practice

There is no single, universally agreed definition of housing affordability; different metrics answer different questions (e.g., qualification for a loan, ongoing payment sustainability, or price levels relative to incomes). In US policy and reporting, one widely used benchmark is the housing cost-burden framework.

• Cost-burdened: housing costs exceed 30% of household income.
• Severely cost-burdened: housing costs exceed 50% of household income.

A second common shorthand is the ratio of median home price to median income, but that measure can be misleading because it ignores the cost of financing (mortgage rates) and loan terms.

A financing-aware metric: the NAR Housing Affordability Index (HAI)

The National Association of REALTORS® (NAR) publishes the Housing Affordability Index (HAI), which explicitly incorporates mortgage rates into a qualification-based affordability measure. In simplified form:

HAI = (Median Family Income ÷ Qualifying Income) × 100

“Qualifying income” is the income required to qualify for a mortgage on the median-priced existing single-family home under NAR’s standard assumptions, including a 20% down payment and a 25% qualifying ratio for the monthly principal-and-interest payment.

Interpretation is straightforward: 100 means the median-income family has exactly enough income to qualify; values above 100 imply more affordability, and values below 100 imply less.

Recent values remain near 100, indicating tight affordability. For example, the fixed-rate HAI was 105.3 in September 2025 and 106.2 in October 2025. For an historical context, the average value since 1985 for the HAI is 137.11.

What moves the HAI: prices, rates, and loan term

Because the qualifying payment drives qualifying income, the HAI is most sensitive to the monthly mortgage payment. That payment is determined mainly by:

• Home price (and therefore the loan amount, given the down payment /loan to value [LTV]).
• Mortgage rate.
• Amortization term (commonly 30 years in the United States).

Policy proposals that aim to improve affordability by changing financing terms generally fall into three buckets: (1) lower home prices, (2) lower mortgage rates, or (3) extend amortization.

Extending amortization: why a 50-year mortgage helps less than it sounds

Some policymakers and commentators have recently discussed longer-term mortgages (e.g., 40- or 50-year amortization) as an affordability lever. A longer amortization reduces the monthly payment, but the effect is modest relative to the term extension. At mortgage rates in the mid-6% range, moving from a 30-year to a 50-year amortization typically lowers the payment by roughly 10%–12% (all else equal).

In addition to the limited payment relief, widespread adoption would create operational complexity and could fragment liquidity in the agency mortgage-backed securities (MBS) market, which is built around standardized 30-year and 15-year products.

Broad MBS purchases by the GSEs: likely limited, non-targeted impact

Recent reporting describes a proposal for Fannie Mae and Freddie Mac (the government-sponsored enterprises [GSEs]) to purchase up to US$200 billion of MBS with the objective of lowering mortgage rates. While additional demand for agency MBS can narrow spreads, analysts quoted in reporting suggest the rate impact may be limited (for example, only on the order of approximately 10–15 basis points [bps]).

Even if it lowered rates modestly, this approach is not targeted to first-time homebuyers; it benefits all borrowers and can also support higher home prices in supply-constrained markets.

A more targeted alternative: a permanent rate buydown for first-time buyers

If the policy goal is specifically to improve first-time buyer affordability, a targeted subsidy can deliver more “payment relief per dollar” than a broad attempt to shift the entire mortgage rate complex. One mechanism is a permanent interest-rate buydown at origination.

In standard mortgage practice, borrowers can pay upfront discount points to reduce the note rate. The exact exchange varies by lender and market, but a common rule of thumb is that one point (1% of the loan amount) may reduce the rate by roughly 0.125%–0.25% (12.5–25 bps). Large rate reductions therefore imply substantial upfront costs.

Via the mortgage rate channel, using HAI index as guide, affordability will return closer to long term average if mortgage rates are approximately 250bps lower than currently available.