Why a 20% Decline Is Not Out of the Question
In today’s American housing market, something has to give.
Home prices are near record highs. Mortgage rates have more than doubled since 2021. And household incomes, while rising slightly, have failed to keep pace. It’s a perfect storm that violates the basic structure of housing economics—what I call the Triangle of Affordability.
The Three Sides of the Triangle
Every functioning housing market depends on a balance of three critical elements:
- Home Prices
- Mortgage Interest Rates
- Household Income
These three elements are interconnected—when one rises, at least one of the others must compensate to maintain affordability.
If home prices are high, then either interest rates must be low or household incomes must be high enough to absorb the cost.
If interest rates are high, then either home prices must fall or incomes must rise significantly to keep monthly payments within reach.
Right now, we have the worst possible combination:
Prices are high, rates are high, and income hasn’t kept up. That’s why affordability has collapsed.
Home Prices: Up Dramatically Since 2020
The median existing home price in early 2025 is approximately $430,000—up around 40% since 2020. Prices were driven higher by pandemic-era migration, historically low interest rates, and years of underbuilding.
Mortgage Rates: From Historic Lows to Crushing Highs
In 2021, buyers locked in 30-year mortgages under 3%. Today, average rates are near 7%. That has more than doubled the borrowing cost. A typical monthly payment on a median-priced home now exceeds $2,800 before taxes or insurance.
Household Income: The Weakest Link
The median U.S. household income in 2024 is around $75,000–$78,000. Yet according to the National Association of Home Builders, families now spend 37–38% of income on mortgage payments—well above the traditional 30% affordability threshold.
This Isn’t the First Time Prices Have Cracked
The last comparable price correction came in 2006–2012, when U.S. home values fell 25–30% nationwide. Then, affordability broke under the weight of overleveraged credit. Today, credit quality is stronger—but the problem is structural: prices are unaffordable even for well-qualified borrowers.
Why Interest Rates Are Unlikely to Rescue the Market
Some hope a drop in interest rates will restore affordability. But that’s increasingly unlikely due to:
- Exploding Federal Debt ($34+ trillion)
- Persistent $2 Trillion Annual Deficits
- Underfunded Social Security and Medicare, both projected to face insolvency in the 2030s
- Congressional Inaction on fiscal reform
- An Aging Population, with rising entitlement costs and fewer workers
- Structural inflation pressures tied to demographic stagnation
Slowing Population Growth: A Hidden Housing Headwind
Despite low fertility (~1.6 births per woman), the U.S. population continues to grow—but only because of immigration.
Between July 2023 and July 2024:
- The U.S. population grew by 3.3 million people (~0.98%)
- 2.8 million of that came from net international migration (84% of total growth)
- Natural increase (births minus deaths) contributed just 519,000 people (~0.15%)
Without immigration, the U.S. population would be barely growing—and is projected to begin declining outright by the 2040s.
If large-scale deportations were implemented, the housing market could face further long-term demand contraction, particularly in renter-heavy urban regions.
Downward Pressure on Future Housing Demand
Even if rates fall or prices soften in the short term, the pool of potential buyers is shrinking.
Expect:
- Lower long-term price pressure
- More supply from retiring Boomers
- Greater demand for smaller, affordable, age-friendly housing
How Much Would Prices Need to Fall?
At 7% mortgage rates, a $75,000 household can afford housing costs of ~$22,500/year (30% of income). That implies a maximum affordable home price of around $350,000—20% lower than current median prices.
In other words, a 20% decline is not only plausible—it may be required to restore a functional market.
A Market in Gridlock
- Homeowners with low-rate mortgages don’t want to sell
- Buyers can’t afford to enter
- Builders are cautious
- Policymakers are stalled
The Triangle of Affordability has fractured. Until one side gives—rates, prices, or incomes—the market will remain frozen.
Disclosures:
This article is for informational purposes only and should not be construed as financial, investment, legal, or tax advice. Any opinions expressed are those of the author and do not necessarily reflect the views of Crosswalk Investment Advisory, Inc., or its affiliates. All information is believed to be accurate as of the date of publication but is subject to change. Past performance is not indicative of future results.
Lee E. Kerr, President, Crosswalk Investment Advisory, Inc., a Registered Investment Advisor
May 13, 2025
This article was researched and edited with assistance from ChatGPT, a language model developed by OpenAI.