Reduced Homebuying Power: How Your Dollar’s Worth Has Shrunk Since Late 2020
The challenging environment for homebuyers continues to intensify, marked by the confluence of escalating prices and surging mortgage rates, making homeownership increasingly unattainable, according to recent data. Despite these obstacles, home purchases continue, with an estimated four million transactions projected for this year. However, the interplay of rising mortgage rates and a dearth of available properties on the market, which fuels price increases and bidding wars, has significantly strained buyers’ financial capacities. Presently, prospective homeowners are borrowing considerably more money for properties, coupled with substantially higher interest rates than just a few years ago. In summary, a homebuyer’s purchasing power has eroded by nearly 50% since the end of 2020.
In December 2020, mortgage rates reached historic lows, with a 30-year fixed-rate mortgage available at 2.68%, marking a substantial drop from 3.78% just a year earlier. Presently, the government-backed lender Fannie Mae reports that the average interest rate on a 30-year fixed-rate mortgage stands at 7.63%. Alongside these rate increases, home prices have surged, with the median sale price of a single-family home exceeding $416,000 in the second quarter of this year, up from just under $360,000 in late 2020. Some metrics indicate that U.S. home price indexes have reached all-time highs.
Lawrence Yun, the chief economist for the National Association of Realtors, notes that by late 2020, the monthly mortgage payment for a typical newly sold home was approximately $1,100 in principal and interest, but it has now doubled. According to the NAR’s calculations, a current homebuyer must earn $107,232 annually to afford the median-priced home. This estimate is based on recent rates for a buyer making a 20% down payment and allocating 25% of their gross monthly income to housing expenses. This calculation may be somewhat conservative, as many individuals allocate more than 25% of their budgets to housing costs, underscoring the growing challenge of affording a home while maintaining financial stability.
Real median household income amounted to $74,580 in 2022, according to the U.S. Census Bureau. Yun emphasizes that for those who do not earn six figures, homeownership in many markets will be exceedingly difficult. Another gauge of this transformation is the NAR’s monthly housing affordability index. A typical reading, Yun explains, is 120, indicating that a person with median income has sufficient funds to purchase a home approximately 20% above the median price. This metric has fallen from nearly 170 pre-Covid to a preliminary reading of 91.7 in August, marking the lowest level since October 1985.
Yun attributes part of this predicament to the housing collapse of 2006-08, which triggered the Great Recession and the global financial crisis. This event led to the failure of many smaller homebuilders, causing the surviving builders to adopt a more cautious approach, combined with the escalating regulatory costs that stifled building for an entire decade. Reduced housing stock availability also stems from the reluctance of homeowners who are currently paying mortgage rates in the 3% to 4% range to sell and purchase new homes at nearly 8%.
The disparity between a monthly mortgage payment at 3% and one at 8% can be substantial. For a median-priced home valued at $416,000 with a 20% down payment, the monthly mortgage with 3% interest totals $1,403, while at 8% interest, it amounts to $2,441. The prevailing housing market conditions have priced many individuals out of the market, leading to increased rental costs. However, there is a silver lining in the rental segment, as many cities are currently witnessing apartment construction, providing relief on the rental front. Moreover, there are positive indicators for homebuilders, with stock prices for companies like Toll Brothers and NVR, the parent company of Ryan Homes, NVHomes, and Heartland Homes, experiencing significant growth. This suggests that investors are eager to provide these companies with capital to facilitate further construction. Although this alone won’t resolve the affordability issue, it is likely to make a positive contribution.
