For many aspiring home buyers, 2023 has been a game of wait-and-see. Soaring home prices, high interest rates and extremely tight home supply have made the search for homes both ultra-competitive and financially prohibitive in large parts of the U.S.
The theme of the year has been the Federal Reserve’s aggressive activity to bring down inflation by raising the interest rates. This indirectly keeps mortgage rates creeping up with each hike of the benchmark rate, even after they have sometimes moved into a more palatable range for home buyers. The 30-year fixed rate mortgage stood at 6.96% in mid-August, far above the rates that fell below 3% during the COVID-19 pandemic.
In July, monthly mortgage payments in the U.S. were just over double what they were in 2020 for the same properties, according to Realtor.com. That has priced significant parts of the public out of affording the limited number of homes that are available.
It shows in home sales. In June, existing-home sales fell to seasonally-adjusted, annual rate of 4.16 million — an 18.9% drop from one year prior, according to the National Association of Realtors.
Based on Redfin data, first-time home buyers now need to earn about $64,500 annually — up 13% from a year ago — to afford a starter-home at a price of $243,000, Forbes reported. A home buyer earning $75,000 or less could afford a home for $256,000. Homes at the price or less accounted for just 23% of existing homes in the U.S. as of April.
“The housing market is in gridlock,” Devyn Bachman, senior vice president of research at John Burns Research and Consulting, told Realtor.com. “Things are moving, but they’re moving very slowly and ineffectually because of how high mortgage rates still are.”
One area of the housing market that has fared better is new homes, which are getting a boost in affordability from some builders offering to buy down mortgage rates. Builders also are constructing more smaller homes to make new housing inventory more affordable.
In June, the median sale price for a new home was $415,400, down from $496,800 last October. The median sale price for an existing home was $410,000 in June, up from $378,800 last October. There is a much smaller gap for home buyers to consider when looking at either type of property, and the advantage may be even more favorable if better mortgage rates are available on new homes.
The challenge for the economy is that the pace of new home construction has been uneven. The Fed’s actions have tightened credit at the same time that inflation continues to increase the cost of building materials.
Photo credit Aubrey Odom/Unsplash.com
