By
Godfrey Benjamin
September 4th, 2023
US residents are going through the worse level of housing affordability not seen for four decades as mortgage rates continue to spike.
Housing affordability in the US has hit its lowest level in about 40 years, caused by a recent hike in mortgage rates. The rising rates have now made it difficult for prospective house owners to purchase homes, and difficult for them to suspend their purchases hoping for possible respite in the near future.
Data from residential real estate brokerage shows that the number of homes sold in June crashed by 15.6% year on year (YoY) to 520,504 following an increase in the 30-year fixed rate mortgage jumping from 1.2% to 6.7% in the same period. According to Redfin:
“Prices are rising despite relatively low demand because there are so few homes for sale. New listings are down 27% year-over-year, the biggest drop since the start of the pandemic, and the total number of homes on the market is down 14%, the biggest drop since March 2022.”
According to home loan mortgage corporation Freddie Mac, the 30-year fixed loan is up from 6.7% to 7.09%. For the Mortgage Bankers Association, the rate is 7.16%
Many reports suggest that US housing affordability is worsening because of the increase in mortgage rates and a heavy shortage in inventory. In addition, previously owned homes are difficult to sell because costs are generally high. Furthermore, the general worry about the economy is causing prospective buyers to rethink their purchases.
The problem is unsurprisingly worse for people with low credit scores, as some get quotes around 8%. According to William Raveis Mortgage regional vice president Melissa Cohn, most buyers still deciding to purchase homes at current conditions hope to refinance much later when rates fall. Cohn also believes current buyers think now is the best time because prices would increase when rates drop and other buyers flock in.
US Housing Affordability May Worsen if Fed Continues Rate Hike
The increase in mortgage rates ties in with the rate hike campaign from the Federal Reserve as it battles inflation. Since March last year, the Fed has increased rates 11 times, bringing the rate to the 5.25% to 5.50% range after the last 25-basis-point increase in July. The midpoint is the highest since 2001.
Last month, a Yale professor of economics Robert Shiller noted that the price of houses has been on a rally for the last 10 years. However, Shiller states that this rally would end if the Fed ends its current tightening cycle.
Unfortunately, the minutes of the last Fed meeting reveal that more rate hikes are possible this year because inflation is still some distance from the 2% target. Fed Chair Jerome Powell also had this position at a news conference after the last meeting. Powell said the Fed will likely raise rates again at the September meeting. However, he promised that the decision would depend on the current economic situation following careful assessments.
Interestingly, the likelihood of further hikes goes against a prediction from economists Reuters polled in July before the last increase. Although they correctly predicted the increase by 25 basis points, they believe the increase would be the last hike for a while.
