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IF YOU THINK STOCKS have fallen fast this year, check out the collapse in the National Association of Realtors’ housing affordability index. The index tracks how financially easy it is for the typical family to buy a house with a conventional 30-year mortgage.
May’s reading of 102.5 is down sharply from the 154.4 recorded in December 2021 and it’s just a whisker away from the lowest levels seen in the past four decades. For those of us in the southern U.S., we have to go back to the mid-1980s to find worse purchasing conditions. It’s a sobering reality for first-time homebuyers, who must contend with higher interest rates and still-soaring property values.
Today’s environment is a far cry from the generous buying conditions seen in early 2021, when the index was above 170. Back then, the average 30-year fixed-rate mortgage was roughly 3%, while home prices were nearly 20% lower. Survey data from the end of last week show the current 30-year mortgage rate at a whopping 5.84%. You have to wonder: Are falling home prices just around the corner?
Goldman Sachs puts out its own version of the housing affordability index. The investment bank’s gauge likewise illustrates a stunningly expensive turn in the domestic housing market—the worst since it started tracking affordability in 1996.
But there are bright spots. First, families are making more now than in early 2021. But the 4.5% rise in median household income has, alas, been less than the rise in home prices and inflation more generally.
Second, families are well positioned today to meet the challenges of high real estate prices and steep borrowing costs. Household financial obligations, as a percent of disposable personal income, remain incredibly low by historical standards. This figure compares debt payments, lease payments, property taxes and rents to after-tax income. It averaged 17% from 1983 through 2009. Today, the ratio is barely above 14%, thanks in part to a strong jobs market.
Last summer my 31 year old daughter (single) was about to close on a nice house in Massachusetts but lost her job two weeks before closing. She found a higher paying job a month later but held off on looking until February . The house she had planned to buy last summer is unaffordable now despite the higher salary .Last week she bid on a house in an unattractive city she did not want to consider before and lost out in a multiple bidder situation. The inventory here is still pretty lean so she is very discouraged.
Your daughter might be wise to hold off looking for perhaps another six months. With mortgage rates and home prices so high, sales are now slowing — and slowing sales usually precede lower home prices. Here in Philadelphia, the housing market has been absurdly hot in recent years. But when I looked on Zillow earlier today, I saw many homes listed with price drops, some of them significant.
Its nice to hear of these few bright spots, and maybe some dual earner families can tighten their belts and buy a home today in the face of escalating prices and mortgage rates. But given the rising costs of food, utilities, insurance premiums, and other costs of daily living, I can only imagine these families as being “house poor.”
If the Fed’s efforts to tame inflation precipitate a recession with rising unemployment, these bright spots may turn out to be merely blips in an otherwise dismal housing picture.
Personally, I have to believe that there will be a reckoning in the housing market at some point. Home prices can’t continue to rise without bound. It shouldn’t take a Herculean effort for a young working couple to buy their first home.