Why it’s getting even harder to keep a roof over your head
And while there are some signs of cooling in the market, it doesn’t look like there will be much relief in sight for home buyers.
A year ago, a buyer who put 20% down on a median priced $363,800 single family home and financed the rest with a mortgage rate of 2.88% — the average at the time — had a monthly payment of $1,208.
Over the past five years, the average home price has gone up by 60% while the average income has risen by less than 15%, said Andy Walden, vice president of enterprise research at Black Knight, a mortgage database company.
“Home prices are significantly out of whack with income levels,” said Walden.
Americans are now spending more than 35% of their median income on monthly principal and interest payments for that newly purchased median-priced home. Historically, Americans spent closer to 25% of median income on payments.
To get back to that level, Walden said, some combination of these things would need to happen: a person’s income would need to grow by 40%, mortgage rates would need to be cut in half, or there would need to be a 30% drop in the median price of a house.
But none of those things are likely to happen any time soon.
How did we get here?
Now buyers are grappling with a combination of high home prices and rising mortgage rates.
“The pain point came when rates returned to their 6% level,” Walden said.
The other side of the issue is supply. Eager buyers were met with a national shortage of homes that has been a long time in the making, creating a supply and demand mismatch that has pushed home prices higher.
The shortfall of units is so deep that it would take more than a decade to catch up, according to NAR.
But even if more homes and apartments are built, it won’t matter unless people can afford them.
So what happens next?
For the time being, however, mortgage rates are likely to rise even more as the Federal Reserve continues to raise interest rates in its battle to fight inflation.
The Fed doesn’t set the rate borrowers pay on mortgages directly. Instead, mortgage rates tend to track the yield on the 10-year US Treasury. As investors anticipate the Fed’s rate hikes, they often sell government bonds, which sends the yield higher and, with it, mortgage rates.
Most housing policy experts say that building a steady supply of new, moderately priced homes is needed to fix the affordability crisis. But because those homes are not as profitable for builders as larger, higher-priced homes, it will take a concerted effort by both public and private sectors.
But none of this is a quick fix, and some of it requires Congressional action.