Many homebuyers have resurfaced this spring after taking a winter lull. But that doesn’t mean that housing is affordable again.
“Right now, we’re still not in a normal affordability position,” Chris Porter, chief demographer at John Burns Research and Consulting, told Yahoo Finance Live (video above). “People are still spending a larger proportion of their income on housing than in the past.”
“To get a grip on affordability again, there are three options: either raise income, lower interest rates, or lower house prices,” he said.
While Porter said incomes are still growing fairly solidly, the other two factors — mortgage rates and house prices — are the driving factors.
During an open house hosted by Prudential realtor Tracy Do, a steady stream of interested buyers, brokers, and brokers pour in and around this 1920’s Highland Park California bungalow. (Image credit: Allen J. Schaben/Los Angeles Times via Getty Images)
Mortgage rates need to be lower
Price-conscious buyers are extremely sensitive to prices. That much has become clear from the latest mortgage applications data after interest rates fell slightly.
The volume of purchase applications recorded the largest weekly increase in three months for the week ended June 14, according to data from the Mortgage Bankers Association (MBA). Overall, buying activity rose 17% week-over-week on an unadjusted basis.
The interest rate on the 30-year fixed-rate mortgage fell to 6.69% this week, compared to 6.71% the week before, according to Freddie Mac. Still, rates have fluctuated between 6% and 7% for most of the year – keeping buyers on high alert for any kind of dip.
An indication of good news is new economic data pointing to a slowdown in inflation. This helped underpin the Federal Reserve’s decision this week to pause its aggressive campaign of rate hikes.
That pause means mortgage rates could remain stable, some experts previously told Yahoo Finance, unless something significant happens in the economy.
“I don’t think we’re going to go back to 3% anytime soon,” Porter said. “This was implied in today’s Fed announcement: we won’t see interest rates fall that fast. Mortgage rates will remain higher than what people have been used to in recent years.”
The story goes on
Homebuilders have taken advantage of mortgage rates by offering their financing arm buybacks to buyers who need a lower interest rate, Porter said.
Builders also have an advantage due to inventory issues. According to the National Association of Home Builders, 33% of the homes on the market were new builds, compared to a typical 12.7% between 2000 and 2019.
“The new build was actually able to step in and represent a larger portion of the inventory for sale,” Porter said. “And that’s why you can see that the builders are doing quite well at the moment.”
A sign reading “Sold” hangs in front of a home currently under construction in the Winthrop Subdivision in Riverview, Florida. (Credit: Chris O’Meara, AP Photo)
Still, Porter calculates that at least 17.1 million more new homes will need to be built over the next decade to meet rising demand. The construction won’t happen overnight, however, and he predicts a slight slowdown in single-family home construction over the next few years.
The other major inventory problem is the lack of older homes for sale. Homeowners are reluctant to put their current home up for sale and forego the existing low mortgage rate.
“We have a pretty strong demand for housing. The challenge is that the supply just isn’t there, especially on the resale side,” Porter said. “We have a very low resale offer. That actually created a kind of floor for how far prices could fall, at least temporarily.”
The few homeowners selling in the market today know they have the upper hand.
According to Altos Research, the median price for a single-family home rose to $454,900 in the week ended June 12, compared to $450,000 the week before. New pending home sales prices also rose 1% this week to $384,000.
Such prices are unaffordable for many prospective buyers.
“[We’re] “In the short term, there will be less homemaking until people feel affordability is in their favor,” Porter said, “and they can buy a home.”
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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