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.