The current housing market looks vastly different from what it was a few years ago, with surging mortgage rates playing a crucial role. The 30-year mortgage rate, a popular option for home buyers utilizing financing, is a key indicator of the state of the market. While the rate has cooled slightly from touching 8% late last year, it still hovers around the 7% level. This means that consumers who are looking to purchase a home with financing are facing higher borrowing costs than they did during the early days of the pandemic when rates were below 3%.
Another important factor in understanding the current housing market is the housing prices. The Case-Shiller national home price index, calculated by S&P Dow Jones Indices, has reached record highs this year. High prices can have different implications for different groups of people. For potential home buyers, it may be a cause for concern as it could mean buying at an inopportune time. However, current homeowners can rejoice as it likely means that the value of their property has increased.
The combination of high mortgage rates and soaring housing prices has resulted in a significant decline in affordability compared to the early days of the pandemic. Various measures of affordability paint a bleak picture. The National Association of Realtors found that affordability had plummeted more than 33% between 2021 and 2023. The Atlanta Federal Reserve’s gauge showed an even higher decline of over 36% in economic feasibility of home ownership when comparing April to the summer 2020 peak. This has pushed the share of income needed by the typical American to afford the median home to above 43%, well beyond the 30% threshold considered affordable.
Reasons for Lack of Affordability
The current lack of affordability can be attributed to several factors. While significant pay increases in recent years have somewhat offset the impact of higher rates and prices, the negative effects still outweigh the benefits. However, it is important to note that despite the high current mortgage rates, a large proportion of borrowers are not actually locked in at these levels. According to the Federal Housing Finance Agency, nearly 98% of mortgages were below the average rate seen in the fourth quarter of last year, with almost 69% having rates 3 percentage points lower than the average.
The low number of borrowers paying the current high rates can be explained by the timing of the housing market. Rates were at historic lows when the market was hot, causing many homeowners to refinance at low levels. As a result, the current high rates are not affecting a large portion of borrowers who took advantage of the low rates in the early stages of the pandemic.
The current state of the housing market is characterized by surging mortgage rates, record-high housing prices, and a significant decline in affordability. While the majority of borrowers are not directly impacted by the current high rates, the overall dynamics of the market are creating challenges for potential home buyers. Understanding these factors is crucial for navigating the complexities of the current housing market.