Home affordability is the worst since 1984

Washington, DC

Buying a home requires a much larger slice of people’s income now — making this the most unaffordable housing market since 1984, by one measure.

This crushing lack of affordability is not expected to improve much in the near future.

In just the past few weeks, housing prices in the United States rose for the first time in months, and the interest rate on a 30-year fixed mortgage reached a 22-year high of 7.23%.

This has made an already dismal affordability picture even worse.

At today’s rates, buying a median-priced home would require a monthly principal and interest payment of $2,440 for those who make a 20% down payment, according to Black Knight, a mortgage technology and data provider.

That means $1,172 more per month in mortgage payments than just two years ago, before the Federal Reserve raised its benchmark lending rate 11 times in 18 months, Black Knight found. That’s a 92% increase — and it drains a growing portion of household budgets that are already facing inflation on many fronts.

Currently, 38.6% of the median household income is required to make the monthly payment for the average home purchase, making housing the least expensive it has been since 1984, according to Black Knight.

“To put today’s affordability levels in perspective, it would take a combination of up to a 28% decline in home prices, a more than 4% decline in 30-year mortgage rates, or up to a 60% growth in Median household income to bring affordability back to its 25-year average,” said Andy Walden, vice president of enterprise research and strategy at Black Knight.

An “affordable” home can mean different things to buyers with different resources.

But housing policymakers usually stick to a standard threshold that paying anything more than 30% of household income is “unaffordable.” Promoting policies that keep housing costs below this level is intended to ensure that families have enough money to cover all their expenses. Households that spend more than 30% of their income on housing costs are considered “housing cost burdened.”

Rising housing costs over the past few years — and incomes that haven’t kept pace — have taken a bigger bite out of the typical income.

Between 2019 and 2021, the number of cost-burdened homeowners rose by 2.3 million households, to 19 million, according to a report from the Joint Center for Housing Studies at Harvard University. This includes 8.7 million people, or 23% of all homeowners, who were severely cost-burdened and paid more than half their income on housing.

The number of cost-burdened renters rose by 1.2 million, to a record high of 21.6 million households, between 2019 and 2021. This has impacted the buying market, with cost-burdened renters likely to struggle to be able to save enough Money to buy a house.

Overall, 40.6 million households were housing cost burdened in 2021, including 20.3 million severely burdened households.

The affordability picture remains bleak this year

Optimistic home hunters continued to face tough affordability conditions in July, as higher mortgage rates and historically low housing inventory pushed prices higher, said Edward Sellers, associate vice president of housing economics at the Mortgage Bankers Association.

That created a double whammy that affected mortgage applications and home sales activity, Seller said.

“With mortgage rates currently above 7% and expected to remain above 6% by the end of the year, affordability will remain an obstacle for many families looking to buy a home,” he said.

Home purchasing costs in the United States are expected to remain high until at least 2024, according to an analysis by Moody’s Investors Service.

This means cash-strapped households can cut spending on new homes and discretionary purchases and shift demand toward rentals and lower-cost housing, Moody’s analysts said.

Homebuyers have already shown sensitivity to price. Existing home sales fell to their lowest levels over the past year when rates exceeded 7%. As costs rise, buyers are simply turning away from the housing market: Applications for home mortgage loans fell to their lowest level since April 1995 last week.

Home inventory on the market remains persistently low after many homeowners purchased or refinanced mortgages at a historical interest rate of 2% or 3%. This leaves no incentive to sell their home and buy another.

Nearly half of all mortgage holders have an interest rate of 3% or less, according to Black Knight. More than 90% have a rate of 6% or less.

“Reduced housing supply is keeping home prices high in many markets, increasing affordability hurdles for buyers,” said Joel Kahn, MBA vice president and deputy chief economist.

However, the tipping point of a lower interest rate that will motivate homeowners to sell, adding inventory to a starved market, seems a long way off.

“We haven’t seen any sign of sellers returning to the market yet, even when 30-year interest rates fell below 6% early this year,” Walden said. “So, exactly where that tipping point lies remains to be seen.”

He said it was clearly much lower than today’s level of interest rates.

“Unfortunately, given today’s lack of inventory and affordability levels, it may take years before home affordability returns to more ‘normal’ levels,” he said.

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