Will Home Prices Ever Become Affordable Again?

Despite scorching summer temperatures in many parts of the country, the housing market is showing tepid activity. As of the second week of August, the national average 30-year fixed mortgage rate crept close to 7%, reaching 6.96% by the week ending August 10.

In 2023, the median sales price for existing homes broke the $400,000 barrier for the first time, reaching $410,200. This figure is now on track to surpass the all-time high of $413,800 from June 2022, as reported by the National Association of Realtors (NAR). Concurrently, monthly existing home sales experienced a 3.3% decline, with all major U.S. regions witnessing year-over-year sales decreases.

Despite the challenge of high mortgage rates, the housing market remains fiercely competitive due to robust demand and constrained inventory supply. This scarcity of housing options is partly due to individuals who purchased homes in recent years at historically low interest rates choosing to remain in their current properties. These factors, along with others, have converged to create a perfect storm of affordability crisis, causing many potential homeowners to be sidelined.

➤ Housing Market Outlook

The housing market continues to grapple with challenges, including surging mortgage rates, elevated home prices, and limited housing inventory—a trio of factors contributing to the ongoing housing affordability crisis. Additionally, the specter of high inflation and further interest rate hikes looms on the horizon.

July witnessed an increase in mortgage rates, surging to 6.96% by mid-month following the Federal Reserve’s decision to raise the federal funds rate by an anticipated 25 basis points at its July meeting. This move indirectly influences long-term home loans, like 30-year fixed-rate mortgages. The federal funds rate, which started near zero in March 2022, now hovers between 5.25% and 5.5%.

Experts believe the Fed’s actions won’t stop there. Federal Reserve Chair Jerome Powell remarked during a post-meeting press conference that the economy hasn’t fully absorbed the effects of their actions and that efforts to rein in inflation toward the 2% target still have a long way to go.

Projected terminal rate data unveiled in June suggests the rate could reach 5.6% by the end of 2023, hinting at the possibility of at least one more rate increase this year. Consequently, many anticipate mortgage rates will remain above 6% for the remainder of the year.

While weekly averages for 30-year mortgage rates have dipped from their peak in fall 2022, the ongoing fluctuation between 6.5% and 7%, or a breach of the 7% threshold again, could impede substantial improvements in housing market conditions. This holds especially true if the Fed continues its rate-hiking course.

In the first quarter of 2023, mortgage originations totaled only $344 billion, the lowest figure since Q2 2014, according to a Freddie Mac report. Experts anticipate originations to remain subdued throughout 2023. Furthermore, existing-home sales witnessed a staggering 18.9% decline compared to the previous year, as reported by NAR.

“I expect the number of homes for sale to decline this year and continue to be a damper on home sales,” shared Danielle Hale, chief economist at Realtor.com, via email. “Limited inventory is also keeping prices high even though housing affordability has deteriorated significantly in the past three years.”

On a more optimistic note, some experts are pointing to signs of a new market phase.

“The recovery has not taken place, but the housing recession is over,” affirmed Lawrence Yun, chief economist at NAR.

Despite this positive perspective, Yun acknowledges that strong demand outpacing housing supply will sustain high home prices. Addressing the affordability challenge for prospective homebuyers hinges on increasing inventory levels.

➤ Housing Inventory Analysis

Low housing inventory, a lingering aftermath of the 2008 housing crash, remains a persistent challenge. The construction of new homes plummeted then, and the market still grapples with its aftermath in 2023.

Housing supply remains historically low, particularly for entry-level homes, thus bolstering demand and sustaining elevated home prices.

New single-family homes are stepping in to mitigate the scarcity of resale inventory. The gap between median existing-home sales prices and new home prices has significantly closed in recent months, enticing homebuyers seeking options.

However, new home sales experienced a slight setback from May to June, falling by 2.5% as mortgage rates crossed the 6.5% threshold. June saw 697,000 new single-family homes sold, down from 715,000 in May. The median sales price for new homes reached $415,400, as reported by the U.S. Census Bureau and HUD.

“New home inventory is becoming competitive with low existing home inventory, and new homes are now competitive on price,” stated Robert Frick, corporate economist at Navy Federal Credit Union.

In October 2022, the median sales price for new homes was $496,800, while the median for existing homes was $378,800—a gap of $118,000. This difference has since narrowed by around 96%.

The inventory of unsold existing homes remained stagnant between May and June, leaving existing inventory constrained to a meager 3.1-month supply at the current sales pace. Existing inventory has remained at record lows for an extended period. Experts suggest that a balanced housing market requires four to six months of inventory.

Jack Macdowell, chief investment officer and co-founder at Palisades Group, noted that inventory is about 46% below the historical average since 1999, making it unlikely that the inventory issue will resolve in 2023.

A Zillow analysis indicates that the nation requires an additional 4.3 million homes to meet demand.

“There are simply not enough homes for millions of people,” stated Orphe Divounguy, senior economist at Zillow. “Unless we address the shortage of smaller, more affordable, starter-type homes, we risk leaving families without a seat—and it will only get worse over time.”

Housing Starts Projection for 2023 Mixed data in the construction sector suggests some homebuilder caution amidst volatile mortgage rate fluctuations and industry challenges.

Single-family construction starts slipped by 7% in June after a four-month uptick, while building permit applications rose 2.2% from the previous month, according to the Census Bureau and HUD.

Builder confidence continues to climb, albeit at a slower pace. The recent NAHB/Wells Fargo Housing Market Index (HMI), tracking builder sentiment, rose from 55 to 56—a level last seen a year ago.

A reading above 50 indicates favorable conditions for new construction.

Despite mortgage rates hovering around 7%, builders scaled back buyer incentives in July as prospective homeowners, hindered by low existing inventory, shifted focus towards new construction. Only 22% of builders offered sales reductions in July, down from 25% in June and 27% in May.

While builders strive to meet demand, challenges persist, including rising material costs, lot availability issues, a shortage of construction labor, and tighter credit conditions due to aggressive interest rate hikes by the Federal Reserve.

Persistently high mortgage rates—indirect consequences of the Fed’s inflation-curbing policies—continue to influence builder decisions.

“Although builders remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month serves as a reminder of the stop-and-start nature the market will experience as the Federal Reserve approaches the conclusion of its ongoing tightening cycle,” explained Robert Dietz, chief economist at NAHB.

➤ Challenges in Achieving Home Ownership

As home prices display signs of softening in select regions, the nation grapples with a housing affordability crisis. A trifecta of factors—limited housing supply, persistently elevated mortgage rates, and climbing sales prices—has cast a shadow over hopeful homebuyers’ prospects.

In June, the median existing-home sales price surged from $396,100 to $410,200, marking the second-highest figure ever recorded and only 0.9% below the peak of $413,800 a year prior, according to NAR.

Although inflation’s fervor has waned, those yearning to become homeowners continue to feel the impact of pandemic-driven home price appreciation combined with elevated interest rates.

For first-time homebuyers eyeing entry-level properties, an annual income of approximately $64,500 is now required—reflecting a 13% increase from the previous year, states a Redfin report. Remarkably, typical starter homes reached an all-time pinnacle of $243,000 in June.

However, if your annual income falls within or under the $75,000 range, the odds of securing a home in today’s market are slim. Earning $75,000 annually equates to affording a $256,000 home. Nevertheless, homes at this price point or below represented merely 23% of existing home listings in April 2023, as outlined in a Realtor.com and NAR Home Affordability & Supply Report.

With home prices rebounding and the average 30-year fixed interest rate surpassing 6%, the erosion of housing affordability is an unsurprising outcome.

A staggering 76% of aspiring homeowners found themselves unable to afford listed homes within their market during the second quarter of 2023—an increase from 73% in the first quarter. This data comes from the Housing Trends Report, which gauges prospective homebuyers’ perceptions of available and affordable homes in their markets, published by NAHB.

Addressing this issue, Orphe Divounguy, senior economist at Zillow, emphasized the urgency of rectifying the shortage of smaller, affordable starter homes, lest families find themselves bereft of housing opportunities as time progresses.

➤ Prospects of a Housing Market Crash

Amidst the backdrop of elevated interest rates, the housing market has largely sustained its upward trajectory from March to May, as indicated by the latest S&P CoreLogic Case-Shiller Home Price Index.

The U.S. National Home Price non-seasonally adjusted (NSA) index portrayed marginal month-over-month and year-over-year declines. Notably, diverse regional variations emerged, with surprising leaders emerging, overtaking traditionally strong contenders like Las Vegas, Phoenix, Tampa, and Miami.

Remarkably, the Rust Belt cities stole the limelight, with Chicago (+4.6%), Cleveland (+3.9%), and New York (+3.5%) leading the pack, as observed by Craig J. Lazzara, managing director at S&P DJI, in the report. He remarked, “If this seems like an unusual occurrence to you, it seems that way to me, too.”

It’s important to consider that these price surges coincided with a spring home-buying season, where the average 30-year fixed interest rate momentarily dipped below 6.5%, even reaching 6.27% in one instance.

“Moderately reduced rates spurred eager buyers to enter the market, but the scarcity of available homes maintained upward pressure on prices,” explained Hannah Jones, economic research analyst at Realtor.com. She highlighted that while the housing market remains unaffordable for many, fierce competition arises due to limited inventory.

In contrast, West Coast cities that flourished during the pandemic experienced a reverse fate, with Seattle (-11.3%) and San Francisco (-11.0%) facing price drops. The West region (-6.9%) remained the least resilient.

Despite pockets of price decline, experts assert that today’s homeowners possess more stable foundations than those recovering from the 2008 financial crisis. The presence of positive equity among many borrowers reduces the likelihood of a market crash.

“Homeowner equity is at a multi-decade high, providing significant value to their homes,” noted Nicole Bachaud, an economist at Zillow.

➤ Forecasting Foreclosure Activity

Foreclosure activity is on an upward trajectory, potentially approaching pre-pandemic levels, according to ATTOM, a property data provider. The first half of the year saw a 13% surge in foreclosure activity compared to the same period in the previous year, signaling a potential ongoing trend.

Rob Barber, CEO of ATTOM, stated, “Although overall foreclosure activity remains below historical norms, the notable surge in foreclosure starts indicates that we may continue to see a rise in foreclosure activity in the coming years.”

In June, foreclosure filings rose by 3% from May and 8% from the previous year, according to ATTOM. While foreclosure completions decreased by 20% from the prior month, they grew by 1% from the previous year.

The states with the highest foreclosure rates in June were Maryland, Delaware, New Jersey, Connecticut, and Illinois.

Despite the increase in foreclosure rates year-over-year, experts predict that 2023 won’t witness a wave of foreclosures. Even in areas with declining home values, homeowners possess substantial equity due to progressive price appreciation in recent years.

Approximately 49% of mortgage-owned residential properties in the U.S. exhibited equity richness in the second quarter of 2023, per ATTOM’s report, signifying that the combined market values of these properties were at least twice the estimated loan balances.

➤ Choosing the Right Time to Buy a Home

Acquiring a home is a profoundly personal decision, demanding financial stability. Calculating monthly housing costs through a mortgage calculator based on down payment and interest rate can aid preparation.

Forecasting the market is ineffective for homebuying strategy. “Buyers anticipating lower prices may be let down,” cautions Neda Navab, president of Compass, a real estate tech firm.

Timing the housing market is challenging, says Divounguy. The ideal moment is when you discover a suitable home meeting your family’s needs within your means.

Instead of waiting for dramatic price drops, experts advise aligning the purchase with your budget and requirements. Sacrificing too much for a house can lead to remorse and forced resale.

Tips for Navigating Today’s Housing Market Flexibility is key if desired areas remain unaffordable. Relocation to cost-effective markets is viable for remote workers.

Prepare by assessing finances, collating documents, comparing lenders, and strengthening credit. This readiness expedites action in a competitive market.

“Only well-prepared individuals with financing, budget clarity, and constant price tracking will succeed in today’s market,” emphasizes Frick.

Engaging a local realtor offers an advantage, vital in a tight housing market.

“Experienced agents offer insights and manage competition,” Divounguy recommends.

Selling in Today’s Housing Market “Correct pricing and agent collaboration are crucial for sellers,” suggests Divounguy. Right-priced homes attract competition while others languish.

Prep homes ahead, avoid common regret of late preparation. Online appeal matters, utilize 3-D tours and interactive floor plans for better visibility.

➤ Affordable Home Prices FAQ

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