Buying a house may seem like an unachievable goal to many prospective buyers. Between mortgage rates flirting with 7% and sky-high property prices, purchasing a house requires significant sacrifices, particularly for first-time homebuyers who must also contend with increasing rent prices taking a toll on their ability to save for a down payment. However, even current property owners who may have purchased their home in previous years when both prices and mortgage rates were more affordable are understandably hesitant to give up their relatively cheap monthly payments and are often opting to make do with less-than-ideal conditions instead of selling their home. According to Black Knight, existing homeowners are listing their homes for sale at a 27% lower pace than normal. Therefore, property prices remain high despite the reduced demand.
According to the latest Mortgage Monitor Report from the Data & Analytics Division of Black Knight, home prices increased 0.7% in May compared to April 2023, equating to an annualized growth rate of 8.9%, and 27 of the 50 largest U.S. metros have returned to their prior home peaks or set new highs during the spring. While inventory is improving slightly, primarily due to longer time spent on the market, it is still 51% lower than pre-pandemic levels.
“As it stands, housing affordability remains dangerously close to its 37-year lows reached late last year, despite the Federal Reserve’s attempts to cool the market,” says Black Knight vice president of enterprise research Andy Walden. “The challenge of the Fed now is to chart a path forward toward a ‘soft landing’ without reheating the housing market and reigniting inflation. But the same lever used to reduce demand—that is, raising rates—has not only made housing unaffordable almost universally across major markets, but it has also resulted in a significant supply shortage by discouraging potential sellers unwilling to list in such an environment, further strengthening prices.”
A Little Perspective
According to Black Knight’s analysis, it takes 35.7% of the median household income to make the average principal and interest payment for a median-priced home, with this number climbing over 50% in expensive West Coast communities such as Los Angeles, San Diego, San Francisco, or San Jose. While it is a concern, it is not the first time in living memory that households must tighten their belts to be able to afford an average home. According to Realtor.com, homebuyers in September and October 1981 spent 51.3% of their household income on their mortgage payments.
While the idea of a typical single-family home costing just $66,125 (the median standard in 1981) may seem like a pipe dream for 2023 prospective buyers, the median income back then was a mere $19,074, according to U.S. Census Bureau data. In addition, mortgage rates topped 18% that fall, meaning that 99.5% of a buyer’s first year of mortgage payments was going toward just the towering amount of interest on the loan.
The good news was that, once mortgage rates fell, most folks who purchased homes in the early 1980s had refinanced their loans to lock in the new rates which dropped into the single digits by 1986 and “drastically” lowered their monthly mortgage payments.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
