House prices continue to rise across the country, but homebuyers’ incomes are not keeping up with soaring real estate values. The result: monthly mortgage payments are now unaffordable for the typical buyer.
This is according to calculations by the Federal Reserve Bank of Atlanta, which found that the median-income household should now spend more than 32% of their annual income to afford a home at the median price – or above. 30% affordability threshold that is used by the US Department of Housing and Urban Development. Home affordability is at its lowest level since 2008, according to the analysis.
These trends are degrading the buying outlook for some Americans, with just 3 in 10 people polled by Fannie Mae in August saying they think it’s a good time to buy, compared to nearly 6 in 10 people in May. House prices across the country have skyrocketed, as house prices jumped nearly 9% in September from a year earlier, according to Realtor.com. Despite record mortgage rates, rising home prices translate into higher monthly expenses for new homeowners.
“What this shows is that house prices have gone up astronomically during the pandemic, and this is putting them increasingly beyond the reach of first-time homebuyers,” said Jeff Tucker, senior economist. at Zillow, about the Atlanta Fed analysis.
He added: “It’s no surprise that we are now seeing affordability measures like this throwing warning signs – that homes are becoming out of reach for the typical buyer to afford them.”
The typical buyer has to pay nearly $ 1,800 a month to cover their mortgage, property taxes and insurance for a median-priced home, according to the Federal Reserve Bank of Atlanta, which based its calculation on data from July. on Housing and Income, the most recent month in the bank’s analysis. A year ago, the typical monthly cost of homeownership was just over $ 1,500.
The median home price was over $ 342,000 in July, up from about $ 279,000 a year earlier, a 22% increase. But incomes did not keep pace, increasing by about 3% over the same time frame, leading to tighter affordability for some homebuyers.
Mortgage rates: “A reason to act now”
The past year and a half has proven to create a perfect storm for homebuyers – and not just affordability. Auction wars, lack of inventory and other challenges have created stressful home search experiences for many. As the housing market heated up in the spring, some homebuyers came up with offers well above asking price and even foregone inspections and other contingencies to ensure a winning bid.
The current state of the housing market reflects several trends, including the shift to remote working during the pandemic, which has prompted some workers to seek housing with offices or more space. Nearly 5 million millennials turn 30 each year, entering their decade of life when they settle down and seek homeownership, Realtor.com noted.
And mortgage rates remain at historic lows, helping to offset rising house prices. The average rate on a 30-year fixed-rate home loan was around 2.9% in September, up from nearly 4% in 2019, before the pandemic, according to Freddie Mac.
“Mortgage rates are another reason people are saying why it’s better to act sooner than later,” Tucker noted. “An unusually large number of people had a reason to act now” to lock in a low rate.
An extra year to save for a down payment
But it will take about 6.4 years for the typical first-time buyer to save 10% of their income to absorb the traditional 20% down payment – a year more than it would have taken five years ago. due to soaring house prices. , revealed a recent analysis by Zillow. Renters will need to save an additional $ 369 per month somehow to keep pace with the expected growth in house prices, the housing company said.
While homebuyers of all demographics are feeling the pressure of rising home prices, it may have a bigger impact on black and Latino families than on white buyers due to the racial wealth gap, Tucker added. About 45% of black Americans own their homes, up from a peak of about 50% in 2004. In comparison, about 74% of white Americans currently own their homes, down about two percentage points from at their peak of 2004.
Rising home prices and affordability issues could “contribute to a growing disparity in homeownership,” Tucker said. Existing homeowners, for example, are better equipped to buy another home since their properties likely appreciated during the pandemic, giving them more equity than they can use to buy a new home.
If there is good news, it’s that the market has gone from “hot white” to just “hot red,” Zillow said. For example, home appreciation rose 1.75% in August, down from nearly 2% in July, the real estate company said.
“There are a few other options out there [with inventory], so buyers feel a little less frantic, ”Tucker said. “Houses take an extra day or two to wait. These are some early signs that the market is returning to normal. “