The chickens have come home to roost for New Hampshire’s housing market.

In May 2023, the state’s affordability index – a measure of housing affordability – hit its lowest point in the two decades it has been recorded.

Experts say the combination of high interest rates, restrictive zoning regulations, and lack of affordable housing is to blame.

The record low in affordability comes as median prices for single-family homes reached a record high of $465,000.

The affordability index for May was 66. According to the New Hampshire Association of Realtors, “The number means the state’s median household income is just 66 percent of what is necessary to qualify for the median-priced home under prevailing interest rates.”

For context, “That’s the lowest in NHAR’s recorded history and a 36 percent decline in two years. By comparison, the affordability index in May 2013 was 180.”

As a result, the market has taken a hit. “There were 1,489 single-family residential homes on the market in New Hampshire at the end of May, a 10 percent drop from a year prior,” according to the NHAR – 1.4 months’ supply of inventory.

A healthy, balanced market is generally 5-7 months’ supply of inventory.

Sales are also down, as “the 959 single-family residential homes sold in May marked a 22 percent drop from May 2022. In the first five months combined, sales decreased 21 percent in 2023 compared to the same period last year.”

Borrowing has become more expensive in the fight against inflation. In early May, the Federal Reserve raised interest rates for the tenth straight time by 0.25 percentage points, bringing rates to their highest mark in 16 years. Today, 30-year fixed mortgage rates are hovering at nearly seven percent.

However, the Fed is widely expected to keep interest rates unchanged when their Federal Open Market Committee meeting wraps on Wednesday.

While monetary policy is important, industry observers say the real problem is at the local level. At a time when housing affordability is at an all-time low in the state, zoning regulations are making it difficult to build affordable housing.

In a 2021 landmark study, Center for Ethics in Society Director Jason Sorens and the Josiah Bartlett Center for Public Policy found residential land use regulations at the local level were a major cause of rising housing costs in the state. As one of the most prohibitive states for residential construction, local regulations – from minimum lot sizes and bureaucratic rules to single-family-only, maximum height, and minimum parking requirements – hinder residential development.

And when the housing supply can’t meet demand, housing prices increase.

The New Hampshire Zoning Atlas, a user-friendly tool to understand local land use regulations, sheds light on the issue. Showing some “23,000 pages of zoning regulations in 2,139 districts in 269 jurisdictions” (according to the Josiah Bartlett Center), the map reveals how difficult New Hampshire townships have made building residential housing.

The Biden administration’s recent attempt to increase housing affordability nationwide was to issue a rule through the Federal Housing Finance Agency (FHFA) adjusting mortgage lending by federal guarantors Fannie Mae and Freddie Mac.

Having gone into effect on May 1, the new rule effectively means that home buyers with good credit will pay more to subsidize those with bad credit. According to The Wall Street Journal, “Home buyers with a good credit score over 680 will pay about $40 more each month on a $400,000 loan, and upward depending on the size of the loan.”

“Those who make down payments of 20 percent on their homes will pay the highest fees. Those payments will then subsidize higher-risk borrowers through lower fees.”

That rule will likely not have its intended effect and could actually worsen the problem. As Bruce Elmslie, chair of the UNH Economics Department, told NHJournal last month, the rule “creates perverse incentives when you’re incentivizing those actors who have lower credit. And increasing the fee on a higher credit score, that’s a disincentive to people from taking the most credit-worthy actions.”

Selling houses to people who cannot afford them, and subsidizing these high-risk borrowers, has a troubling recent history (think back to the 2008 housing market crash).

In an op-ed for the Union-Leader, state Sen. Donna Soucy and Rep. Matt Wilhelm, both Manchester Democrats, touted the housing funding included in the new state budget that passed with large bipartisan majorities.

“If you’ve tried to find housing in New Hampshire, you are acutely aware that the cost of rent is rising nearly 20 percent year-over-year, which is unsustainable for workers and young families. To alleviate this crisis, Democrats fought to include $25 million for the Affordable Housing Fund, $10 million for InvestNH, and $5.25 million for the newly formed Housing Champions program,” they wrote.

But as long as interest rates remain high and onerous zoning regulations are widespread, taxpayer dollars won’t be enough to create the estimated 150,000 new housing units the state will need by 2040. And with Tuesday’s report that unemployment in New Hampshire dropped to the lowest level ever recorded in the state at 1.9 percent, the demand for that housing won’t diminish any time soon.