While housing prices are on the rise across the country, incomes for homebuyers aren't keeping pace with rising real estate values. This has led to monthly mortgage payments that are no longer affordable for most buyers.
According to the Federal Reserve Bank of Atlanta calculations, the median income household would need to spend more that 32% of their annual income to buy a median-priced house. This is above the 30% threshold used by the U.S. Department of Housing and Urban Development to determine affordability. According to the analysis, home affordability has fallen to its lowest point since 2008.
These trends are affecting Americans' views on home-buying. Only 3 out 10 Americans surveyed by Fannie Mae said they think it's a good moment to buy. This is down from 6 out 10 in May. According to Realtor.com, housing prices have increased across the country, with home listings prices increasing almost 9% in September, compared to a year ago. Despite record low mortgage rates, rising home prices are resulting in larger monthly outlays for new homeowners.
This shows that home prices have risen astronomically during the pandemic and that it's increasingly making them unaffordable for first-time buyers," stated Jeff Tucker, Zillow senior economist, regarding the Atlanta Fed's analysis.
He said, "It is not surprising that we now see affordability metrics such as this one warning signs that homes are becoming out of reach for most homebuyers to afford them."
According to the Federal Reserve Bank of Atlanta's calculations, the average homebuyer will need to pay $1,800 per month for their mortgage, property taxes, and insurance to purchase a median-priced house. This calculation was based on July housing data and income data. The average monthly cost of homeownership was slightly higher than $1,500 a year ago.
In July, the median home price was more than $342,000, up 22% from last year's $279,000. However, incomes have not kept pace, increasing by 3% in the same period. This has led to a affordability crunch for some homebuyers.
The last year and a half has been a storm for homebuyers, and not just for affordability. Many have had stressful experiences when searching for a home. There has been bidding wars and a shortage of inventory. Some homebuyers went above and beyond the asking price to secure a winning bid.
There are several trends that have influenced the current housing market. One is the shift to remote working during the pandemic. This prompted some workers looking for homes with more space or offices. Realtor.com reports that almost 5 million millennials turn 30 every year and are now entering the decade of their life when they want to settle down and buy their own homes.
Mortgage rates are still at historic lows, which helps to offset rising housing prices. According to Freddie Mac, the average rate for a 30-year fixed rate home loan was 2.9% in September, compared to almost 4% in 2019, before the pandemic.
Tucker stated that mortgage rates are another reason people say it's better not to wait. "Unusually many people had a reason now to act," Tucker noted, in order to lock down a low rate.
A Zillow analysis has shown that it will take a typical first-time homebuyer 6.4 years to save 10% of their income in order to pay off the 20% downpayment. This is a year more than it would have taken five or six years ago due to the rise in home prices. According to Zillow, renters will need to save $369 each month in order to keep up with the expected rise in home prices.
Tucker said that while homebuyers of all demographics feel the pressure of rising home prices, it could impact Black and Latino buyers more than White buyers because there is a racial wealth gap. From a peak of around 50% in 2004, only 45% of Black Americans now own their homes. Comparatively, 74% of White Americans own their homes today, which is down two percentage points from their peak in 2004.
Tucker stated that rising home prices and affordability problems could lead to "a wider disparity in homeownership access." For example, existing homeowners are more likely to be able to buy another house because their homes have likely appreciated during the pandemic. This gives them more equity which they can use for a new property.
Zillow stated that there is some good news. The market has gone from being "white hot" and now it is merely "redhot". According to Zillow, August saw a decrease in home value appreciation of 1.75%, compared with almost 2% in July.
Tucker stated that there are more options available [with inventory], so buyers feel less overwhelmed. "Homes take one to two extra days to go pending. These are early indications that the market is returning back to normal.
