A perfect storm of low inventory and high prices and interest rates is squeezing a record number of potential homeowners out of the housing market.

Home affordability precluding millions from the American Dream

By Andy Kriege, YSN

If home is where the heart is, more and more Americans are experiencing some home-made heartburn when it comes to attaining the American Dream of home ownership.

The affordability index — a costly mix of high average sale prices coupled with high interest rates — has squeezed many potential home buyers out of the market, making that dream of home ownership unattainable for a large portion of the population. 

Moreover, stats released last Tuesday by the National Association of Realtors (NAR) show that the housing market slowdown continued last month, with sales of previously-owned homes falling to an annualized rate of 3.8 million units, a 13-year low. Sales slipped 4.1% from September and fell 14.6% from October 2022, falling short of analysts’ expectations of 3.9 million units changing hands. 

“Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation,” said NAR Chief Economist Lawrence Yun. “Fortunately, mortgage rates have fallen for the third straight week, stirring up buying interest. Though limited now, expect housing inventory to improve after this winter and heading into the spring, and more inventory will result in more home sales.”

The average rate on a 30-year fixed mortgage currently stands at 7.44%, down from a mid-October high of more than 8%. But tight supply has kept pressure on housing prices, with the median price of an existing home sold in October up 3.4% year over year, to $391,800 from $378,800. Prices rose across all regions of the country for the fourth consecutive month, with roughly 28% of homes selling above list price.

According to a recent report by real estate agency Redfin, homebuyers must earn $115,000 annually to afford a median-priced house in the U.S., based on median monthly mortgage payments in August 2022 and August 2023. That’s $40,000 more than the typical American household earns, effectively putting home ownership out of reach.  

Redfin considers a monthly mortgage payment to be affordable if the homebuyer spends no more than 30% of his or her income on housing. Based on that rule, and today’s typical monthly mortgage payment of $2,866, a borrower must have a gross monthly income of $9,553 to afford a median priced home, an all-time high.

While the economy and the housing markets move through cycles, it’s unlikely for mortgage rates to decline substantially in the near term, especially as the Federal Reserve is expected to keep the benchmark interest rate high for the foreseeable future. 

As 2024 approaches, the housing market stands at a critical juncture. While it continues to be squeezed by high mortgage rates, what goes up eventually comes down, and a recent analysis by Morgan Stanley projects home prices to fall 3-5% next year, suggesting some relief for homebuyers in the foreseeable future.  

Nevertheless, as AVB economic observer Joe Higgins recently wrote, the national shortage of homes, the extreme affordability issues and the rise in interest rates has impacted BrandSource members’ businesses throughout the year. “Homeownership is becoming a dream, not a reality,” he noted, “as fewer Americans have neither the income nor savings to afford a home in this market.”

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