CONTRIBUTORS
Mike Salm
Director of Multi-Sector Strategy
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.
Housing Index Indicates Tight Affordability
1986–2025
Source: Bloomberg. Analysis by Franklin Templeton Fixed Income Research. As of September 30, 2025. The Housing Affordability Index (HAI) is a statistical measure that assesses the affordability of housing in a specific region or market.
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.
Housing Has Become More Affordable When Mortgage Rates Have Been Approximately 250-bps Lower
September 30, 2025
Source: HAI Index from National Association of Realtors using data as of September 2025. Analysis by Franklin Templeton Fixed Income Research. For demonstration, assuming Mortgage Rate is an estimate of the 30-year fixed rate mortgage rate available during the reference period used for NAR HAI Index. Assumes each Up-Front point reduces mortgage rate by 18.75-bps. As of September 30, 2025.
The key implementation constraint: Qualified Mortgage (QM) points-and-fees caps
A practical constraint is that many lenders rely on the Qualified Mortgage (QM) framework. Under Regulation Z, QMs are subject to caps on total points and fees. For larger loans (above an annually adjusted threshold), the cap is 3% of the total loan amount, with different caps for smaller loans.
A policy design that relies on a large number of discount points would therefore require either (a) a structure that does not count as borrower-paid points/fees under the QM calculation, or (b) a targeted statutory/regulatory exemption for a narrowly defined program.
Illustrative cost sketch (order of magnitude)
The cost of any buydown program is extremely sensitive to (i) the targeted rate reduction, (ii) eligible loan size, and (iii) annual first-time buyer volumes. As an illustrative example using credible assumptions based on recent history:
- Assume a subsidy equivalent to 10 points (10% of loan amount) to deliver a large permanent rate reduction.
- Assume 4.746 million primary-residence home purchases per year (new + existing homes), based on NAR’s survey methodology discussion.
- Assume first-time buyers are 21% of all buyers, implying about 1.0 million first-time purchases annually.
- For the home value, the average loan amount for first time home buyers in September 2025 for GSE and Federal Housing Administration (FHA) funded loans was approximately US$342,000. For the same time period, the American Enterprise Institute’s Housing Center published US$285,000 as the entry level home value (the median price of home sales after removing the top 20th percentile of sales on FHA)— implying a loan balance of US$260,000 for 90% LTV loan.
Under those assumptions, the implied gross subsidy would be approximately US$26-US$34billion per year (e.g., 0.10 × $260,000 × 1,000,000 ≈ US$26 billion). This is an order-of-magnitude estimate; actual program costs could be materially higher or lower depending on eligibility and design.
Financing capacity and fiscal framing
Fannie Mae and Freddie Mac have recently generated substantial earnings and have been building capital under conservatorship. The Congressional Budget Office notes combined annual earnings averaging about US$28 billion over 2023–2024, which provides context for scale when comparing policy options that would operate through the GSE balance sheets. Using the earnings of the GSEs would provide a credible way to fund the buydown program without increasing the fiscal deficit. With a well-designed program, it could provide significant affordability relief for first-time home buyers.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal.
Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
There is no assurance that any estimate, forecast or projection will be realized.
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