Homes in the United States are currently the least affordable since 2006, according to new statistics, as recent mortgage rate hikes continue to cause an unprecedented spike in house prices.
The National Association of Realtors revealed on Friday that its Housing Affordability Index – a measure that uses median existing home prices, median family incomes and average mortgage rates to calculate home affordability – fell to 102.5 last May.
The number is the lowest on record since July 2006, when the index fell to 100.5 – shortly before the housing bubble burst in 2008, and the number of foreclosed homes jumped thanks to predatory lending practices major banks in the country.
The number is also dangerously close to the lowest level ever recorded by the index, set in July 1990, when the index stood at 100.2.
The decline depicts a real estate market that is becoming increasingly inaccessible to first-time home buyers, who have been deterred from entering the market by rapidly rising house prices – which have reached a record average of 407,600 $ in May.
The National Association of Realtors revealed on Friday that its Housing Affordability Index – a measure that uses median existing home prices, median family incomes and average mortgage rates to calculate home affordability – fell to 102.5 last May, the lowest recorded since 2006.
The typical monthly mortgage payment, meanwhile, has risen to $1,842, NAR said — from $1,297 in January and $1,220 a year ago. That’s an increase of almost 50% in less than six months.
The drastic increases suggest that a decline in homeownership is on the horizon, as potential buyers entering the market inevitably avoid offers that would require them to shell out these amounts – unless, of course, sellers reduce asking prices.
The looming housing crisis comes after a period of relative affordability seen in 2020 and last year during the pandemic, due to record mortgage rates – although prices are also rising during this period to meet similarly growing demand.
This year, however, shortly before the Fed decided to raise interest rates to combat record inflation, banks dramatically raised mortgage rates last month, in their own effort to cover losses. potential to suffer from the decline of the US dollar.
In its biggest one-week jump since 1987, the 30-year fixed-rate mortgage, the most popular home loan package, rose to 5.78% in June from 5.23% at the end of May.
It has since reached an even more pronounced level of 5.83% from the week ending July 1, after approaching 6%.
A year ago, the affordability rate was roughly half of what it is today, at 2.9%.
The sudden rise has since seen the country’s housing market cool considerably, with sales of previously owned homes slipping in May for the fourth month in a row, as would-be buyers face increased costs.
The drastic increases suggest a decline in homeownership is on the horizon, as potential buyers entering the market inevitably avoid deals that would require them to shell out such amounts. Home sales under $250,000, a price range favored by first-time buyers, have fallen sharply as interest rates rise, crowding out younger buyers
Falling demand should see house price growth peak by the end of the year – before inevitably collapsing, economists warn.
“We are in a housing affordability crisis right now,” Robert Dietz, chief economist at the National Association of Home Builders, told The Wall Street Journal of the phenomenon, citing how real estate companies have cut prices. requested in recent weeks to compensate for the rapid evolution of the real estate market.
Homes in cities that have seen marked price growth in recent years, including Boise, Idaho; Phoenix, Arizona; and Austin, Texas have seen average home prices fall in recent weeks, according to real estate brokerage Redfin Corp.
Meanwhile, other economists say home prices are likely to continue rising in the coming weeks as the inventory of homes for sale generally remains low.
Active listings in June were down 34% from June 2020, according to the most recent data from Realtor.com, and 53% from June 2019, before the pandemic.
“I don’t know if we’ll ever see affordability again like we’ve seen over the past two years,” Mark Fleming, chief economist at First American Financial Corp, said of Friday’s report from the National Association of Realtors.
30-year fixed mortgage rates do not move in line with the rate set by the Fed, but follow the yield of 10-year Treasury bills, which are influenced by factors such as inflation expectations , the actions of the Fed and the reaction of investors to all of this.
The average price of a home in the United States is up 14.8% from a year ago, the association said.
With high prices and rising rates squeezing younger buyers — many of whom are millennials aging into their best home-buying years — the number of existing home sales fell 8.6% from to last year, reaching a seasonally adjusted annual rate of 5.41 million.
The median sale price for existing homes, meanwhile, remains at $407,600, a 14.8% increase from a year ago.
Median home prices were highest in the West at $633,800. The median price in the Midwest was $294,500, the South $375,000, and the Northeast $409,700.
The U.S. median sale price for existing homes set a new record high at $407,600 in May, a 14.8% increase from a year ago, the National Association of Realtors said.
The sales in May were mainly closings of contracts signed one to two months ago, before mortgage rates began to accelerate amid soaring inflation expectations and aggressive interest rate hikes from the Federal Reserve.
The average contract rate on a 30-year fixed-rate mortgage jumped 55 basis points last week to a 13.5-year high of 5.78%, according to data from mortgage finance agency Freddie Mac. .
This is the largest one-week increase since 1987. The rate has jumped more than 250 basis points since January.
Mortgage interest rates, meanwhile, are expected to continue to rise amid this economic uncertainty, economists say, and are likely to exceed 6% in the coming months if buyers continue to shy away from the new rates and sellers refuse to lower them.
Rates have largely stayed below 5 since the 2007-09 recession.
The development follows a period when the housing market was quite warm, when demand saw an increase spurred by investors buying properties to let when prices fell during the pandemic.
Last year also saw increased demand from the US Covid-19 pandemic, hampering the choice of where they wanted to live.
Median home prices in May and price change from a year ago are observed for each region
Jason Roberts is one of many Americans who began the home buying process around this time, and has since experienced a change of heart since rates nearly doubled.
Roberts, who started shopping for his first home in Sacramento earlier this year and was quoted a mortgage rate of 3.75%, says he has since canceled the purchase after seeing rates soar.
“Now you have high prices and tariffs,” he said. ‘I would like to buy, but the market is simply prohibitive.
Demand was seen as recently last month, when NAR Chief Economist Lawrence Yun warned that the housing market was likely to cool in the coming months due to rising mortgage rates.
“Further declines in sales should be expected in the coming months given the housing affordability challenges associated with the sharp rise in mortgage rates this year,” he said.
With supply still too low, prices could remain high, even if sellers reduce the list price in some areas where bidding wars were once rampant.
“Existing home sales are expected to continue to slow through the year as mortgage rates rise,” David Berson, chief economist at Nationwide in Columbus, Ohio, said in June.
He said the crisis, while severe, is not expected to cause home sales to fall as drastically as that seen in 2008 – unless the country experiences further economic turmoil.
“But in the absence of a deep and sustained economic downturn, home sales are unlikely to fall as they did during the housing crisis – allowing prices to continue to rise on average.”
Existing home sales fell in May to the lowest level since June 2020, when sales rebounded from the COVID-19 lockdown crisis. Sales rose in the Northeast, but fell in the densely populated Midwest, West and South.