Housing Affordability Taking a 'Nosedive This Year'

A homebuyer must earn $107,281 to afford the $2,682 monthly mortgage payment on the typical U.S. home, up 45.6% from $73,668 a year ago, according to a recent Redfin report.

Housing affordability took a “nosedive this year,” reaching all-time lows, according to Crystal Sunbury, real estate and construction senior analyst with RSM US.

Mortgage rates, which climbed steeply in recent months, eased as a result of inflation cooling more than expected in October, and were at 6.65% on Nov. 14, down from 7.25% just a week prior.

“Easing mortgage rates and home prices, which have begun correcting over the past couple of months, will help provide some relief to housing affordability,” Sunbury said.

“However, home prices remain 8.4% above prior year, while mortgage rates are over double from the same time last year.

The cost of buying a home remains elevated, with average monthly payments over 50% higher than what they were at the beginning of the year for a median priced home, which has made homes unaffordable for many Americans, she added.

“For homes to become affordable again, incomes would need to rise drastically, mortgage rates would need drop meaningfully, or home prices would need to drop significantly,” Sunbury said.

“Incomes and mortgage rates are not likely to change drastically, and while we expect to see additional market corrections to home prices over the next few months, housing inventory remains depressed in most markets, making it unlikely that prices would drop too significantly.

“Further, while builders have homes under construction that are coming into the market, we are not likely to see a large influx of existing inventory, due to most Americans having locked mortgage rates below 3%.”

Don’t Blame Inflation

Scott Harris, top agent with Brown Harris Stevens, tells GlobeSt.com that it’s not inflation that’s directly pushed up the cost of purchasing, it’s the cost of a mortgage.

“If rates continue to stay higher, the cost of carrying a new home will also stay higher,” Harris said. “If prices soften, this will undoubtedly help buyers, but it’s unlikely that price drops will be enough to make home purchases as affordable as they were before mortgage rates jumped.”

Quentin Green, partner and director of development at Chicago-based Downtown Realty Company, tells GlobeSt.com, that home affordability will likely remain the biggest hardship facing the housing market through 2023.

The recent Consumer Price Index (CPI) print “was positive in that it indicated we might have already seen peak core inflation,” Green said. “However, we will still need to see continuous declines in the CPI in order for rates to actually come down. To be clear, we are still in a rate-hiking environment, and most experts anticipate a 50-basis-point hike in December, so I think we are still a long way away from seeing any rate cuts.”

Buyers Must Consider Lower-Priced Homes

Charles Constant, founder and broker-in-charge at Robertson Howland Properties, tells GlobeSt.com that as the cost of borrowing has increased, the buying power has declined, and buyers need to consider a home priced lower than even a few months ago.

“While the sellers continue at a higher value, we are starting to see some capitulation to lower prices,” Constant said. “Even though some price reductions are becoming more common, the overall health and appreciation of these homes remains higher than a few years ago.

“We have some lenders getting creative with lower down payment options and a return to ARMs. Our buyers continue to snap up great homes at realistic prices.”

Comparing It to Rentals

Galen Faurot-Pigeon, analyst, Markerr, tells GlobeSt.com that data shows that due to the rapid rise in home prices and interest rates that the average cost of homeownership across the U.S. has risen by 44% YoY in September 2022.

The average homeownership premium is currently 61% and 105% relative to renting an apartment and renting a single-family home, respectively, he said.