Rising mortgage rates are making it more difficult for many people to buy a home. Elijah Nouberge/Bloomberg via Getty Images
There’s one undeniable fact about the U.S. housing market. For the majority of potential homebuyers, it is unaffordable.
Buying a home hasn’t been cheap in recent decades, but the pandemic housing boom has started to drive prices up significantly. That’s because remote and hybrid work has expanded the map for millions of Americans, many of them millennials who are entering their peak homebuying years. . Zoom Town has boomed, and prices have followed suit.
However, in 2022, mortgage interest rates rose from the 3% range to over 7% in the blink of an eye, shocking many people under the age of 40, but decades of construction work still pushed prices to the floor. was maintained. Now, housing industry executives have released numbers showing just how bad it’s gotten.
As mortgage rates hit a multi-decade high of 7.49%, Andy Walden, vice president of enterprise research at ICE Mortgage Technology, did some calculations. Mr. Walden, who previously served as vice president of data and analytics at real estate data company Black Knight for many years until its recent acquisition by ICE, knows the mortgage market inside and out and is the author of Mortgage, a monthly magazine that analyzes housing finance trends. Led the creation of Monitor. He calculates that for the housing market to be considered affordable, U.S. incomes would need to increase by a whopping 55%.
“If you think about housing affordability itself and what it takes to normalize the market today,” he told CNBC’s Kelly Evans. exchange, “This is a 35% adjustment in prices, or a 4% decrease in prices. [mortgage] interest rate, or a 55% increase in income, or a combination thereof. ”
But imagine that house prices drop by 35% or your boss gives you a 55% raise. Not likely, right? “These are large-scale movements we’re talking about,” Walden said. “None of these things happen in isolation. None of those single factors cause action.”
Other housing industry experts share Walden’s view. In other words, don’t wait for mortgage rates or home prices to drop right away.
“Unlike at the turn of the millennium, today’s home prices are rising along with mortgage rates, largely due to inventory shortages,” Freddie Mac Chief Economist Sam Cater said in a statement. . These headwinds are causing both buyers and sellers to hold out in search of better conditions. ”
For reference, the average monthly income for Americans is $4,600, according to CEIC August 2023 data. But a quarter of new buyers will be paying an average monthly principal and interest payment of at least $3,000 on a 30-year fixed-rate loan as of July 2023, according to Black Knight. For some buyers, that could mean an increase of $800 to $1,000 per month in their mortgage payments.
Additionally, some homeowners may spend more than 60% of their paycheck on their mortgage alone. As a result, fewer hopeful home buyers are entering the market.
“Demand has been at its lowest level during the pandemic over the past three weeks, certainly constraining the market and affordability to the lowest levels in 40 years,” Walden told CNBC. “So we see demand being suppressed and the expected demand from rising interest rates also being further suppressed.”
He continued: “But when it comes to how the market will react, the biggest question is what will happen to inventory. Are we going to see some inventory build up here over the next few months?” he asked. do. “If that happens, prices may come down. If not, we’ll just see this impasse play out in the market.”
While it’s easy to understand that rising home prices continue to keep potential buyers out of the housing market, a more troubling problem is the lack of inventory. Zillow says inventory for new listings is increasing very slightly, but it’s not enough to ease the pressure on new buyers. The number of new listings increased by 4% from July to August.
Compared to the 25.6% year-on-year decrease in July compared to the 12.7% year-on-year decrease, there are signs of slight recovery. But Zillow senior economist Jeff Tucker says this slight increase in new listings by no means indicates the inventory “drought” is over.
“This is by no means a bonanza or a glut of new listings,” he said in a report in late September.
Walden called this an “above-seasonal-average increase in inventory,” and it’s worth keeping an eye on in the coming months.
“We’re going to monitor that inventory data very closely,” he said. “That will tell us what home prices are going to be like later this year.”