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Homeownership has become less affordable and many experts believe relief is near, but that is far from the truth.
Home prices have risen more than 20% in the US housing market over the past year and mortgage rates have nearly doubled.
This combination has made homeownership far less affordable for millions of Americans, and many of them are at risk of being locked out of business.
Now, it may seem logical that fewer buyers will lower house prices, but don’t be so sure.
There are two aspects of house price dynamics and both are likely to be affected. And that may mean the much-needed price cut may not be on the way yet.
Homes have certainly become less affordable
House prices rose at a rapid pace in 2021 and 2022. Indeed, according to the S&P CoreLogic Case-Shiller Index, house prices increased by 20.4% in April 2022 (most recent data available) compared to April 2021.
Not only have prices gone up, but mortgage rates have also skyrocketed. The average rate on a 30-year fixed-rate mortgage was just under 3% a year ago but stands at 5.81% at the time of this writing.
Here’s what it means for buyers. Let’s say you wanted to buy a house for $ 300,000 a year ago. Assuming a 20% down payment, you might expect to pay around $ 1,005 in principal and interest (P + I) per month for a 30-year mortgage.
Fast forward to today. The house itself would cost $ 361,200 based on the average rise in house prices in the United States.
Your 20% down payment would be $ 72,240, not the $ 60,000 you should have paid a year ago.
And the P + I portion of your monthly mortgage payment would be $ 1,697, nearly 70% more than it was a year ago. To say home ownership has become less affordable is an understatement.
The real estate market is showing signs of slowing down
Unsurprisingly, given the decreasing affordability of home ownership, rising inflation, and the growing likelihood of a recession, recent data shows that potential homebuyers may be on the sidelines.
According to the National Association of Realtors, existing-home sales fell 3.4% in May to their lowest level since June 2020, when COVID-19 restrictions were hitting the market hard.
New home sales are also falling rapidly and are at the slowest pace since the start of the pandemic.
A low supply could keep prices high
Despite the clear slowdown in the real estate market on the buyer’s side, keep in mind that, like any other market, real estate is largely governed by the dynamics of supply and demand.
And there is reason to believe that the supply may remain depressed for some time, and for the same reasons buyers are starting to stay away.
Think this way. Let’s say you own a house that is worth a lot more than what you paid for it a few years ago and you would like to improve it.
However, you have a mortgage with an interest rate of less than 3%, but if you are selling and buying a new home, you will need to get a new loan with a rate of around 6%.
So it’s not just about being able to afford a down payment on a house in exchange, but also about being able to afford the monthly installments.
Simply put, many existing homeowners don’t want to give up on the generationally low mortgage rates they have.
Based on the most recent data, stocks of existing homes increased from February to May, although this is partly due to seasonality and stocks remain lower than they were a year ago.
Also, keep in mind that the COVID-19 restrictions were still impacting the market around this time last year.
It is also important to note that most of the recent mortgage rate hike has happened in the past month and it will take some time before we see how it will affect the numbers.
According to the National Association of Realtors chief economist Lawrence Yun, “the impact of higher mortgage rates is not yet fully reflected in the data.”
Just as we see buyers sitting on the sidelines as rates rise, it wouldn’t be surprising to see sellers doing the same.
Reference Source: The Ascent
