American families aren’t imagining it: we’ve had affordability problems since at least 2022. The situation was improving markedly throughout last year, right up until this February, but overseas conflicts reversed some of that progress. Once the wars with Iran and in Ukraine conclude, affordability will start to improve again.
The cost-of-living crisis started during the Biden administration when prices rose so much faster than earnings that people’s paychecks shrunk in terms of their purchasing power. Although the average American’s weekly paycheck grew roughly 17% during President Joe Biden’s term, it bought about 4% less.
For many families, that meant canceling vacation plans or being unable to buy a newer vehicle. For others, it meant having to put some necessities — like rent, prescriptions and food — on credit cards. Even when inflation came down, families were still facing high costs since inflation is the rate of price increases, not the prices themselves.
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To add insult to injury, 40-year-high inflation prompted the fastest rise in interest rates in just as long. Not only did prices rise rapidly, but so did borrowing costs. That was a deadly one-two punch for homeownership affordability as higher home prices and mortgage interest rates combined to double the monthly payment on a median-priced home in just four years.
But affordability was improving after January 2025. Real (inflation-adjusted) weekly paychecks rose roughly 2% on average from January 2025 through February of this year. While not a windfall, it was still good progress and reversed half the cumulative losses from the Biden years as income growth outpaced inflation.
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Tax and regulatory reform, along with sound energy policy, were spurring economic activity and wage growth while keeping inflation down. Then the Iran war broke out. Global energy markets specifically and supply chains broadly were severely disrupted, causing costs to skyrocket.
Oil prices quickly rose from $60 or $70 per barrel, depending on the market, to $100 or $120. Prices at the pump soon followed, but the energy shock is spilling over to more sectors of the economy with each passing day.
Energy is an input cost in every product and service consumers buy. Food at the grocery store was grown with diesel-powered tractors and fertilizer synthesized from natural gas. It was transported to the store on a truck, and maybe a train too, fueled by diesel. Prices for everything from airfares to plastics to manufactured goods are up because of the energy shock.
The reversal in progress on affordability is evident in housing too. Homeownership affordability hit a three-year high in February and, while still relatively low, marked a significant improvement from the record low in the Biden years. However, it’s fallen each month since then to the lowest level since July 2024 as interest rates ramped up.
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Those higher mortgage interest rates are also a result of the current energy shock. When fuel supplies began falling, energy prices rose, and that in turn drove inflation expectations higher. Interest rates followed as lenders demanded a higher return for the anticipated inflation.
And the disruptions are not just from the Middle East, but Eastern Europe too. Ukrainian strikes on Russian energy infrastructure have exacerbated the shortage of oil and petroleum products, especially diesel. The result was higher prices and lower real earnings.
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However, unlike the runaway inflation that peaked in 2022 at an annual rate exceeding 9%, today’s higher prices are not from the government devaluing the currency by spending, borrowing and creating too much money. Rather, this is an energy shock that is causing countless prices to rise.
The difference in causation means there’s a different solution and a better outlook too. The affordability crisis was easing significantly until the energy shocks hit, and those shocks came from overseas. There’s nothing wrong with the domestic fundamentals underpinning the American economy.
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Investment is booming. The manufacturing sector is expanding at the fastest pace in at least four years. The private sector is adding jobs. AI is fueling productivity growth and earnings are still growing. Once the conflicts overseas are resolved, energy markets will begin to normalize and costs will start declining. Then the economy will be firing on all cylinders.
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Just as higher energy prices are pushing up costs everywhere else, so will lower energy prices put downward pressure on consumer staples everywhere. Likewise, inflation expectations will fall, dragging interest rates back down and improving homeownership affordability. Falling prices and rising earnings mean more breathing room for families.
None of this will happen overnight because supply chains take time to heal, but it’s crystal clear that once peace returns, affordability will follow. All the other pieces of the puzzle are already in place.