The recovery is slowed by a housing shortage in general, of affordable homes in particular. (DNY59/Getty Images)

Lawrence Yun, chief economist of the National Association of Realtors in Washington, has a natural inclination to promote the health of the housing market, since NAR members depend on home sales to make a living. So when Yun warns about affordability issues causing a potential slowdown in home sales, people listen.

“Right now affordability is a flashing yellow light on the housing market, and I just hope it doesn’t become a red light that stops the housing recovery,” Yun says.

The housing recovery has pushed home prices higher, with the median national price reaching $247,700 in June, the highest recorded since NAR began tracking prices in 1968, which Yun attributes to inventory issues.

“People need to focus on the fact that we have a major housing shortage in this country,” Yun says. “This is a direct result of nearly a decade of sluggish home building, and there’s no sign that builders will be able to kick-start construction now. We’re only seeing incremental increases in home building.”

Yun is among a growing number of experts saying the housing market may be heading toward a cliff if the inventory and affordability issues are not addressed.

Bryan Sullivan, executive vice president and chief financial officer of loanDepot in Foothill Ranch, Calif., shares Yun’s concern about the potential stalling-out of the housing market.

“The affordability crunch tells us that the increase in home prices needs to slow down,” Sullivan says. “Even when interest rates are low, if prices rise too fast, buyers will be kept out of the market.”

Sullivan says millennials don’t yet have the opportunity to create wealth because their earning power has been reduced by the lingering effects of a recession. Homeownership has long been considered an important factor in wealth formation for middle-class households. The recent decline in homeownership, which has dropped to 62.9 percent, the lowest rate since 1965, could exacerbate income inequality.

The housing market “is like an onion that’s so vibrant and healthy on the outer layer but decaying on the inside,” says Nela Richardson, chief economist for the Redfin real estate brokerage. “Sales are hitting record highs, prices are growing — that’s the market we can see. But if you dig deeper, there’s chronic inventory shortage. We don’t have enough homes for sale or rent. We certainly don’t have enough affordable homes, and that’s a problem.”

“For decades, homeownership served as the most reliable seed of wealth creation for the middle class,” Richardson adds. “But there’s now a risk that this seed will remain dormant for far too many families due to a chronic shortage of affordable homes in thriving neighborhoods, limited access to financing even with record-low mortgage rates and sky-high rents that eat into down payment savings.”

In the face of wage stagnation, a sputtering employment recovery and global instability — problems that worry many analysts — Yun says the U.S. economy is “muddling along.” He sees some cause for optimism in the labor market.

“Tightening labor markets mean that wages should be picking up in the future,” he says.

Health of the housing market

For now, real estate experts say, the housing market is doing well, but it could be better. Sales of new and existing houses increased this spring, compared with a year ago, but the numbers are strong primarily because of repeat buyers, not the first-time buyers needed for a robust market. Demographics show that sales should be even stronger.

“It’s 1999 all over again,” says Rick Roque, managing director of retail for mortgage lender Michigan Mutual in Boston.“Mortgage loan production is around $1.2 [million] to $1.3 million, which is the same as in 1999, but we have way more households than we did then and home prices have risen, so it should be much higher.”

Roque says that a large segment of the population has yet to recover from the recession.

“People with the top 3 or 4 percent of income were the ones who recovered the most,” Roque says. “Job expansion just isn’t there in the middle tier of income.”

But Michael Fratantoni, chief economist of the Mortgage Bankers Association in Washington, says he expects a strengthening economy will lead, in turn, to a strengthened housing market for the next three years, despite the tight inventory. The association’s data show that applications for purchase loans have been 10 to 15 percent higher in 2016, compared with 2015 and 2014. However, purchase applications don’t always result in a loan. Some applications are denied and not all qualified applicants find a house to purchase.

“A trend we’re starting to see this year is growth in applications at all levels of the market,” Fratantoni says. “In 2014 and 2015, the growth in mortgage applications was mostly at the high end of the market, but now we’re seeing growth at all levels, including the lower-priced homes which are typically purchased by first-time buyers.”

Brian Koss, executive vice president of Mortgage Network in Boston, says the housing market along the East Coast, where he has offices, has been recovering this year in a less choppy fashion than previously.

“Over the past three years, we’ve seen a general rise in the purchase market in wealthier areas and densely populated urban areas,” Koss says. “Now the recovery has spread to more rural and up-and-coming areas, too.”

Affordability, income inequality

Even with purchase applications up this past spring and other positive housing market indicators, some experts are concerned about the long-term implications of home prices rising faster than wages.

Median home prices rose 4.8 percent from June 2015 to June 2016, according to NAR, but wages remain relatively stagnant. According to the Economic Policy Institute, wages grew 2.6 percent during that same period.

According to the 2016 State of the Nation’s Housing report, from the Joint Center for Housing Studies of Harvard University, “from 1980 to 2014, the average real income of households in the bottom decile was down 18 percent while top-decile incomes were up 66 percent.” The number of households with net wealth of $1,000 or less was nearly 20 million in 2013, and more than 43 million had less than $25,000 in net wealth, up from 30 million in 1992.

Affordability issues come into play not simply because of higher prices, but also the lack of wage growth, particularly for households on the lower end of the income scale.

“When affordability deteriorates it makes it harder for people to buy a home or to save for a home, but it also has a psychological impact that makes people less comfortable buying a home,” Yun says. “Homeownership rates are at historic lows. Both housing prices are up and rents are up, which means everyone’s housing costs are higher.”

It appears that most consumers still believe that homeownership is financially worthwhile. According to a 2015 Demand Institute survey, 78 percent of heads of households polled agreed or agreed strongly that homeownership is an excellent investment.

Inventory crisis

Rising rents make it difficult for tenants to save the money needed to make the transition to homeownership, and rising prices mean even a minimal 3 percent down payment represents a significant sum of money.

Koss says affordability issues concern him more than inventory.

“Even if inventory picks up, if buyers are priced out of the market, then the housing market will slow down,” Koss says. “If home prices stabilize, that will help the market a lot.”

Affordability issues are closely linked to the lack of homes for sale, a problem particularly pronounced among lower-priced residences. According to the State of the Nation’s Housing report, inventory in the bottom- and middle-value tiers in metropolitan areas shrank by more than 38 percent from 2010 to 2015. At the same time, the pace of household formation has increased with up to 1.3 million new households in 2015. The millennial generation is expected to create 2 million households a year over the next decade, although those households, initially, are more likely to rent than buy a home.

Sullivan says low interest rates drove up demand for homes to buy and their prices, while the lack of building during the housing crisis reduced inventory. He says many builders focused on rental apartments, which doesn’t help meet demand for homeownership.

“Home building is not robust because there’s been limited availability of construction loans since the housing crisis and since new regulations have been put in place,” Yun says. “Local regulations about land use, permits and impact fees are also slowing construction and making it more expensive. There’s also a shortage of construction workers, bricklayers, plumbers, carpenters and electricians.”

According to the State of the Nation’s Housing report, more than 2 million workers left the construction industry between 2007 and 2013 and only 40 percent of those displaced workers have returned to the industry.

Another obstacle to home building is the lack of available land. According to the State of the Nation’s Housing report, the number of vacant developed lots in 50 metro areas shrank by 30 percent from 2008 to 2013, and their availability is now is similar to what it was in the early 2000s.

Yun points out that the economics of home building agitate against making use of those ready-to-build lots for affordable housing. “Builders tend to build larger and more expensive homes because of the fixed costs for them to build,” he says.

On the other hand, he says, any increase in inventory tends to stimulate the market. “Even building more big homes helps because the buyers of those homes will need to sell their existing homes to buyers. That will increase inventory, hopefully with some of those homes more affordable.”

Koss says the lack of inventory in areas where young first-time buyers want to live, particularly in cities and inner suburbs with thriving economies, is another reason many choose to rent. “They would rather wait to buy if they can’t find what they want,” he says.

Mortgage availability

Another issue that could slow the housing recovery is limited credit availability, particularly for first-time buyers.

“Our credit availability index shows that there have been some small improvements in the past couple of years, but in general, credit standards haven’t eased,” Fratantoni says. “We think purchase mortgage volume would be higher if credit were looser. Qualifying for a loan is a hurdle for a lot of buyers.”

Koss says his offices are seeing more millennials pre-approved for loans, but he says they tend to move slowly and cautiously before buying a home and would rather wait than risk buying the wrong home.

“Most first-time buyers use [Federal Housing Administration-insured] loans because they have a lower down payment requirement and allow lower credit scores and a higher debt-to-income ratio,” Sullivan says.

Conventional loans are also available with lower down payments for first-time buyers, but their credit score and debt-to-income requirements are higher than for FHA loans.

“A lot of people with flat or low wages have two or more jobs to make ends meet or have a tenure of two years or less in a job, which makes it harder for them to qualify for a loan,” Roque says.

Student loan debt is another issue for would-be buyers. NAR estimates that student loan debt delays homeownership by about five years. The Harvard study cites information from the federal Survey of Consumer Finances that shows 20 percent of all households had student loan debt in 2013, up from 12 percent in 2001.

Roque says credit scores are another obstacle that must be overcome for a full housing market recovery.

“The average credit score for loan applicants is 640, but the average score for our closed loans is 725,” Roque says. “We need to get more incentives in place to broaden access to credit for home buyers.”

Nearly 70 percent of all mortgages for a home purchase in June were for borrowers with a credit score of 700 or above, with nearly 46 percent of them scoring 750 or above, according to mortgage-processor Ellie Mae’s Origination Insight Report. And younger adults, ages 25 to 44, who also tend to be first-time home buyers, have an average FICO credit score of only 629, according to CreditKarma.com, a free credit and financial management website.

Koss says he finds wealthier buyers, even with good credit, can also have a hard time qualifying for a loan. “Buyers with lots of assets but no regular income stream or a nontypical income stream have more trouble than some first-time buyers getting a loan, even if they have $3 million in the bank,” he says.

Contributing to that situation are ability-to-repay rules set for lenders by the federal Consumer Financial Protection Bureau, because the rules focus on income rather than assets.

An improving economy should help the housing market, increasing the availability of credit and promoting wage growth that can make loan payments more affordable.

“If investors believe that consumers are in a decent place and that home prices have stabilized, they are more likely to invest in mortgages,” Sullivan says. “Additional investments, particularly in nongovernment loans, would encourage lenders to expand their credit standards.”

On the other hand, as the economy strengthens, mortgage rates are likely to rise.

“Rising mortgage rates are inevitable, and that will reduce affordability further,” Yun says.

What experts are saying about housing affordability

●“Right now affordability is a flashing yellow light on the housing market.” — Lawrence Yun, chief economist for National Association of Realtors

●“The affordability crunch tells us that the increase in home prices needs to slow down. Even when interest rates are low, if prices rise too fast buyers will be kept out of the market.” — Bryan Sullivan, executive vice president and chief financial officer of loanDepot in Foothill Ranch, Calif.

●“It’s 1999 all over again. Mortgage loan production is around $1.2 [million] to $1.3 million, which is the same as in 1999, but we have way more households than we did then and home prices have risen, so it should be much higher.” — Rick Roque, managing director of retail for Michigan Mutual in Boston.

●The housing market “is like an onion that’s so vibrant and healthy on the outer layer but decaying on the inside. Sales are hitting record highs, prices are growing — that’s the market we can see. But if you dig deeper, there’s chronic inventory shortage. We don’t have enough homes for sale or rent. We certainly don’t have enough affordable homes, and that’s a problem.” — Nela Richardson, chief economist for Redfin real estate brokerage.

●“When affordability deteriorates it makes it harder for people to buy a home or to save for a home, but it also has a psychological impact that makes people less comfortable buying a home.” — Yun

By the numbers

●The housing recovery has pushed home prices higher, with the median national home price reaching $247,700 in June, the highest recorded since National Association of Realtors began tracking prices in 1968.

●According to the 2016 State of the Nation’s Housing report, from the Joint Center for Housing Studies of Harvard University, “from 1980 to 2014, the average real income of households in the bottom decile was down 18 percent while top-decile incomes were up 66 percent.”

●According to the State of the Nation’s Housing report, inventory in the bottom- and middle-value tiers in metro areas shrank by more than 38 percent from 2010 to 2015. At the same time, the pace of household formation has increased, with up to 1.3 million new households in 2015.

●70 percent of purchase loans in June were made for borrowers with a credit score of 700 or above, but the average FICO score for people age 25 to 44 is 629.

●20 percent of all households had student loan debt in 2013, up from 12 percent in 2001. NAR estimates that student loan debt delays homeownership by five years.