What you need to know about the affordability debate

Stock valuations trade near their highs while consumer confidence is close to its low. How can that be? The inescapable word – affordability – explains much of the deep disconnect. Concerns about the cost of living, linked in particular to high costs and scarce supply in the housing sector and strains in the labor market, stand in stark contrast to seemingly unbridled investor optimism.

On the housing front, high mortgage rates sting. The median U.S. homebuyer would, at current mortgage rates, devote 37.5% of income to housing payments for a median-priced home – well above the pre-pandemic level of 24%.

Then there’s a U.S. labor market in a “low hire, low fire” state. That’s fine for the employed. But it’s a tough time to find a new job, especially for younger workers.

One statistic, the U.S. labor share – the percentage of gross domestic product (GDP) paid as labor compensation – illustrates the challenging nature of the current job market. This share has fallen structurally over the past 30 years, especially in the post-COVID economy. At the same time, capital or profit share has risen, supporting the stock market but not necessarily workers. That helps explain the divergence between poor economic sentiment and solid corporate earnings growth.

Politicians and policymakers are paying attention. We think affordability will be a primary focus for the Trump administration in the lead-up to the U.S. midterm elections. Investors should watch for policy shifts, especially around housing and tariffs, as affordability remains a central theme shaping sentiment and market dynamics through 2026.

Read “The affordability debate: Why sentiment and markets diverge” (PDF).

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