Rapid Rise in Mortgage Rates Renders Homeownership Unattainable for Many Americans
Housing affordability has plummeted to the lowest level on record this year, as mortgage rates soared, making home ownership out of reach for millions of Americans, according to a report published by Redfin. The report reveals that only 15.5% of homes for sale in 2023 were deemed affordable for the average U.S. household, marking the lowest level since Redfin began tracking data in 2013. This is a drastic decline from the pre-pandemic figure of 40% and the 2022 figure of 20.7%.
Factors Behind the Decline
The decline in affordability can be attributed in part to a 21.2% drop in listings throughout the year. However, the major contributors are the surge in mortgage rates and subsequent rise in home prices. These factors have pushed the portion of average wages required for major homeownership expenses to 35%, as per a separate report from real estate data provider ATTOM.
The Impact of Rising Mortgage Rates
The Federal Reserve’s aggressive interest rate hikes propelled mortgage rates to new highs, surpassing 7% for the first time in almost two decades. Although rates have begun to retreat slightly, with the average rate for a 30-year fixed loan falling to 6.67% this week, it remains significantly higher than the 6.27% recorded a year ago and the pandemic-era lows of 3%. Consequently, the typical monthly mortgage payment has increased by approximately $250 compared to last year, as stated in the Redfin report.
Stagnant Home Prices amid Mortgage Rate Surge
Surprisingly, home prices have not seen substantial increases despite mortgage rates more than doubling in the past three years. This is largely due to the limited number of available homes for sale, as sellers who secured low mortgage rates before the pandemic have been hesitant to sell. This scarcity of options has made it challenging for eager buyers to find suitable properties.
Improving Affordability on the Horizon
Although the housing affordability crisis persists, there is some positive news on the horizon. The report suggests that housing affordability is gradually improving and could continue to do so in 2024. Redfin Senior Economist Elijah de la Campa explains, “Many of the factors that made 2023 the least affordable year for homebuying on record are easing. Mortgage rates are under 7% for the first time in months, home price growth is slowing as lower rates prompt more people to list their homes, and overall inflation continues to cool.”
Overall, while the current state of housing affordability remains dire, there are signs of potential relief in the coming year. The combination of stabilized mortgage rates, a slowdown in home price growth, and a possible increase in available listings may offer a glimmer of hope for those seeking affordable homes.
