The summer season poses numerous challenges for individuals aspiring to become homeowners. The housing market remains stagnant due to a lack of affordability and inventory, recent credit tightening, higher interest rates, and a stabilization of home prices nationwide after a brief correction last fall.
Nick Gaylord has been on the search for a home in Minneapolis for a much longer time than anticipated. Over the course of a year and a half, he has lost out on four homes despite making underwritten offers that surpass the asking price by as much as 20%. Gaylord diligently checks listings multiple times a day, but properties disappear within a day or two of being listed.
While Gaylord has certain advantages, such as a strong down payment and flexibility in terms of location, he is restricting himself to a lower-priced bracket below the median price range for the area. As a remote worker in the healthcare field, he aims to be responsible and avoid over-extending himself, especially given potential layoffs in the industry.
Recognizing his privileges, Gaylord acknowledges that even with these advantages, it remains incredibly challenging to achieve the common life goal of homeownership. Using a metaphor from video games, he compares his experience to playing on the “easy” mode and yet still struggling.
Understanding the Difficulty
Several factors contribute to the frustrating state of the housing market this summer.
Supply: Low housing inventory leads to higher prices and lower sales, which is unusual for the typically busy summer season. Many current homeowners who secured mortgages at low rates during the pandemic are hesitant to sell and become buyers in a market with rates at 6% and above.
Around 60% of existing mortgage holders, who could potentially bring more inventory to the market, have mortgages with rates below 4%. Despite the potential for profitable sales, they lack the incentive to list their homes in the current environment.
Affordability: Affordability has worsened lately as mortgage rates approach 7%. In June, the monthly principal and interest payment required to purchase a median-priced home reached the highest level on record, according to Black Knight.
Nationally, the average mortgage payment accounts for approximately 36% of the median household income, exceeding the recommended allowance of 30% for housing. Income growth since the fall of 2022 has prevented May from being the least affordable month for housing in the past 37 years.
Lenders: Credit availability has tightened, with the Mortgage Bankers Association reporting that credit availability is near its lowest levels since early 2013. Lenders are streamlining their operations by reducing loan programs and even exiting specific channels.
In May, the Mortgage Credit Availability Index fell to its lowest level since January 2013. The conventional loan index and government-backed loan index, which examines loans supported by the Federal Housing Administration, the US Department of Agriculture, or the Department of Veterans Affairs, both remained unchanged in June after decreasing in May.
This tightening credit situation for government-backed loans further complicates matters for lower-income and first-time home buyers, who also face a severe shortage of inventory.
The MBA index for jumbo loans, which are larger than conforming loan limits, contracted for the second consecutive month as financial institutions reduce their appetite for larger loans not backed by the government.
A Glimmer of Hope
The situation may seem bleak for those aiming to purchase a home, but there are a few positive aspects to consider.
Nationally, rents are slightly declining, although they still do not align with incomes. Between early 2020 and mid-2022, rents increased by approximately 25% across the country. However, in May, monthly rents decreased by 0.5% year over year in the 50 largest metropolitan areas, with a median rent of $1,739.
Additionally, mortgage rates are expected to drop in the second half of the year as inflation continues to cool. Economists and housing analysts predict that rates will end the year around 6%.
Furthermore, national home prices are trending lower. The median home price has been decreasing on a monthly year-over-year basis since March, according to the National Association of Realtors.
Lastly, during this typically busy time of year, there are fewer buyers, resulting in reduced competition. This creates an opportunity for individuals with limited funds, particularly first-time buyers.
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