Homes in the US are currently the cheapest since 2006, new statistics show, as recent increases in mortgage rates continue to push home prices up to unprecedented levels.
The National Association of Realtors announced on Friday that its housing affordability index — a metric that uses median existing home prices, median family incomes and median mortgage rates to calculate home affordability — fell to 102.5 last May.
The number is the lowest since July 2006, when the index fell to 100.5 – just before the housing bubble burst in 2008 and the number of homes foreclosed on, thanks to predatory lending practices by the country’s big banks, soared.
The number is also dangerously close to the lowest level ever recorded by the index, which was set in July 1990 when the index was 100.2.
The decline reflects a housing market that is becoming increasingly inaccessible to first-time homebuyers, who have been deterred from entering the market by rapidly rising home prices — which hit a record $407,600 average in May.
The National Association of Realtors announced Friday that its housing affordability index — a metric that uses median existing home prices, median family incomes and median mortgage rates to calculate home affordability — fell to 102.5 last May, its lowest level since 2006
The typical monthly mortgage payment, meanwhile, rose to $1,842, NAR said — up from $1,297 in January and $1,220 year-over-year. That’s a nearly 50 percent increase in a span of less than six months.
The sharp rises suggest a decline in home ownership is on the horizon, as potential buyers entering the market inevitably shy away from deals that would require them to fork out those amounts — unless, of course, sellers lower the asking prices.
The looming housing crisis comes after a period of relative affordability seen in 2020 and last year during the pandemic due to record-low mortgage rates – although prices have also risen during this period to meet a likewise rising demand.
This year, however, just before the Fed decided to raise interest rates to combat record inflation, banks raised mortgage rates sharply last month in their own effort to cover anticipated losses that would result from the falling US dollar .
In its biggest one-week jump since 1987, the 30-year fixed-rate mortgage, the most popular home loan package, rose to 5.78 percent in June, up from 5.23 percent at the end of May.
Since then it has reached an even more pronounced 5.83 percent in the week ended July 1 after hitting almost 6 percent.
A year ago, the affordability rate was 2.9 percent, about half what it is today.
The sudden surge has since caused the country’s housing market to cool significantly, with home sales falling for a fourth straight month in May as potential buyers grapple with rising costs.
The sharp rises suggest that home ownership is on the horizon, as potential buyers entering the market inevitably shy away from deals that would require them to fork out those amounts. Home sales below $250,000, a price bracket favored by first-time buyers, have fallen sharply as interest rates have risen, crowding out young homebuyers
The fall in demand is expected to cause home price growth to peak by the end of the year – before inevitably collapsing, economists warn.
“We’re in the midst of a housing affordability crisis right now,” Robert Dietz, chief economist for the National Association of Home Builders, told the Wall Street Journal of the phenomenon, citing how real estate firms have slashed asking prices in recent weeks to compensate for the fast changing real estate market.
Homes in cities that have seen significant price increases in recent years, including Boise, Idaho; Phoenix, Ariz.; and Austin, Texas, have real estate brokerage firm Redfin Corp.
Meanwhile, other economists say house prices are likely to continue rising in the coming weeks as the stock of homes for sale generally remains low.
The number of active listings in June fell 34 percent from June 2020, the latest data from Realtor.com shows, and 53 percent from June 2019 before the pandemic.
“I don’t know if we’re ever going to see affordability like we’ve seen in the last year or two,” said Mark Fleming, chief economist at First American Financial Corp, in the National Association of Realtors’ Friday report
30-year fixed-rate mortgage rates don’t move in tandem with the Fed’s set rate, instead tracking the 10-year Treasury yield, which is affected by factors including inflation expectations, Fed actions, and investor reaction to it all.
The average price for a home in the United States has risen by 14.8 percent compared to the previous year, the association said.
With high prices and rising rates putting pressure on young home buyers — many are millennials aging into their homebuying prime — existing home sales fell 8.6 percent year-over-year at a seasonally adjusted annual rate of 5.41 million back.
The median selling price for existing homes, meanwhile, remains at $407,600, up 14.8 percent year-on-year.
Median home prices were highest in the West at $633,800. The median price in the Midwest was $294,500, $375,000 in the South and $409,700 in the Northeast.
The US median selling price for existing homes hit a new record of $407,600 in May, up 14.8 percent from a year earlier, the National Association of Realtors said
May’s selling was largely in deals signed a month or two ago, before mortgage rates began to rise amid rising inflation expectations and the US Federal Reserve’s aggressive rate hikes.
The average contract rate for a 30-year fixed-rate mortgage rose 55 basis points last week to a 13.5-year high of 5.78 percent, according to data from mortgage financing agency Freddie Mac.
That was the biggest one-week hike since 1987. The interest rate is up more than 250 basis points since January.
Mortgage rates, meanwhile, are likely to rise further amid this economic uncertainty, economists say, with them expected to exceed 6 percent in the coming months if buyers continue to shy away from the new interest rates and sellers refuse to lower them.
Rates have largely stayed below 5 since the 2007-09 recession.
The development follows a period when the housing market was quite hot, when demand was spurred by investors buying properties to rent as prices plummeted during the pandemic.
Last year there was also increased demand from the American Covid-19 pandemic, which hampered the choice of where to live.
For each region, the median home prices in May and the year-on-year price change are shown
Jason Roberts is one of many Americans who started home buying around this time and have since had a change of heart since interest rates nearly doubled.
Roberts, who began buying his first home in Sacramento earlier this year and received a 3.75 percent mortgage rate, said he has since called off the purchase after seeing the rates.
“Now you have high prices and high rates,” he said. “I would love to buy, but the market is just unaffordable.
The demand was only seen last month, when NAR chief economist Lawrence Yun warned that the housing market is likely to cool off in the coming months due to the rise in mortgage rates.
“Further sales declines should be expected in the coming months as housing affordability is challenged by the sharp rise in mortgage rates this year,” he said.
With supply still undesirably low, prices could remain high, although sellers are lowering the listing price in some areas where bidding wars used to be prevalent.
“Existing home sales should continue to slow throughout the year as mortgage rates rise,” said David Berson, chief economist at Nationwide in Columbus, Ohio, in June.
He said the crisis, while serious, shouldn’t result in home sales falling as sharply as it did in 2008 – unless the country sees further economic turmoil.
“But in the absence of a deep and prolonged economic downturn, home sales should not fall as they did during the housing crisis – allowing prices to continue to rise on average.”
Existing home sales fell in May to their lowest level since June 2020 as sales rebounded from the COVID-19 lockdown slump. Sales rose in the Northeast but fell in the Midwest, West, and populous South.