American house hunters are struggling with the impact of increasing mortgage rates and stagnant housing prices. The National Association of Realtors affordability index has reached its lowest level since 1989, standing at 91.7 in August. This means that households with median income do not earn enough to qualify for a mortgage on a median-priced home.
Let’s take a moment to consider the challenges faced by the typical American house hunter over the past year leading up to August:
– Median price: Saw a rise of 3.7% to $413,500.
– Mortgage rates: Increased from 5.29% to 7.15%.
– Estimated payment: Up by 26% to $2,234 per month, assuming a 20% downpayment.
– Payment share of incomes: Rose from 22.6% to 27.3%.
– Qualifying income: Increased by 26% to $107,232.
Lawrence Yun, the chief economist of NAR, stated that “The highest mortgage rate in two decades is detrimentally limiting the homeownership opportunity for many middle-class households.” Yun believes that unintentionally, the Federal Reserve is widening social inequality, as only households with an income above $100,000 are comfortably able to purchase a home.
In recent times, a series of interest-rate hikes by the Fed, as well as a surge in bond yields, have pushed mortgage rates to their highest level in over 20 years. This situation is negatively affecting both housing supply and demand. It not only sidelines prospective buyers, but also discourages homeowners from giving up their low rates to move. Consequently, this restricts inventory and keeps prices high.
According to the University of Michigan’s latest consumer survey, 62% of respondents stated that now is a bad time to buy a home due to higher borrowing costs. This is close to the highest share recorded since 1982.
As mortgage rates have continued to rise in recent weeks, affordability has likely worsened since the August data was released. In light of these challenges, the NAR, Mortgage Bankers Association, and National Association of Home Builders have written a letter to Fed Chair Jerome Powell, requesting that interest rates not be raised any further.
It remains uncertain whether policymakers will heed this request. During their last meeting, a majority of officials expressed a need for one more interest-rate hike this year. A strong inflation report on Thursday suggests that this option is still on the table, although the selloff in Treasuries may eliminate the need for further increases.
For the time being, it is likely that interest rates will remain elevated until central bankers are convinced that inflation is consistently declining.
(Bloomberg and the Southern California News Group’s Jonathan Lansner contributed to this report.)
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