Despite market slump, high rates dim homebuyer affordability

Homeownership is likely to remain a pipe dream for many Americans this spring homebuying season.

The nation’s worst housing slump in nearly a decade stoked hope among prospective buyers that homes could be scooped up more easily. But while prices appear to have peaked last summer, they still ended 2022 higher than they were at the end of 2021. And the median U.S. home price has increased 42% since 2019.

A series of interest rate increases by the Federal Reserve last year is making matters worse for homebuyers, pushing mortgage rates to their highest level in two decades.

The average long-term rate on a 30-year mortgage reached a two-decade high of 7.08% in the fall. Rates eased in December and January, but have been climbing since early February. The average rate hit 6.73% last week, the highest level since early November. A year ago, it averaged 3.85%.

That rate translates into a roughly 49% increase in the monthly payment on a median-priced U.S. home than a year ago, said George Ratiu, senior economist at Realtor.com.

“For real estate markets, the rise in rates means higher mortgage payments, deepening the affordability challenge just as we move into the crucial spring homebuying season," he said.

For prospective buyers holding out for a meaningful dip in mortgage rates, they may be in for a long wait. Zillow recently polled 100 economists and real estate experts on their outlook for what the average rate on a 30-year mortgage will be by the end of this year and the median forecast was 6%.

Stronger-than-expected reports on the economy this year have fueled expectations that the Federal Reserve may have to keep pushing up its key borrowing rate to tame inflation, deepening the affordability challenge for would-be buyers like Joe Arndt in Reiserstown, Maryland.

The 28-year-old athletic trainer has been looking to buy a home in the Baltimore area for over a year, but hasn’t found much he can afford within his $225,000-$250,000 price range. He now feels shut out of the market.

“I thought that things would start to cool down a little bit more,” Ardnt said. “Prices are still the same as they were a year ago, if not a little higher.”

Another factor that may keep people out of the housing market is the fact that the amount of money a typical homebuyer needs to earn in order to afford a house continues to climb. In the fourth quarter of last year, you had to make at least $80,142 a year to buy a home at the national median price of $325,000, according to an analysis by Attom, a real estate information company. That’s a nearly 36% increase from the same quarter in 2021.

The analysis, which was based on data from 581 counties, defines an affordable home purchase as a transaction that includes a 20% down payment and monthly costs for the mortgage payment, property taxes and insurance that don’t exceed 28% of the buyer’s annual income.

One market shift that could help make homes more affordable is a significant increase in homes for sale. Nationally, there are more available now than a year ago, and that’s likely to increase in coming weeks as traditionally more homes hit the market in the spring months.

The number of homes for sale rose for the first time in five months in January to 980,000, up 15.3% from a year earlier, according to the National Association of Realtors. That amounts to a 2.9-month supply at the current sales pace — better than in January last year.

But it's still far from the 5- to 6-month supply that reflects a more balanced market between buyers and sellers. And the prospects for a bigger spike in supply are slim, given that new construction hasn’t kept up pace with demand after years of underbuilding following the housing crash in 2008. At the same time, most homeowners with a mortgage have locked in ultra-low rates over the years and have less financial incentive to sell.

It’s not all bad news for buyers. The bidding wars that led to homes often selling for well above asking prices a year ago are less common as higher mortgage rates have forced some buyers out of the market. And data show sellers are more willing to lower their asking price than they were a year ago.

Sobhit Haribhakti, 29, and his fiancée Sierra McNeilly, 26, were worried higher borrowing costs would hamper their bid to become homeowners. But the couple, who live in the Cleveland suburb of Strongsville, were able to find a house they could afford.

The couple got a two-bedroom, two-and-a-half-bathroom house for around $230,000, or $15,000 below asking price, and financed the purchase with a 30-year mortgage with a fixed rate of 5.75%. The seller also kicked in $10,000 toward their closing costs.

“We’re definitely going to refinance at some point,” Haribhakti said. “But it seems like the way it worked out we got a pretty good amount of seller concessions.”

Buyers like Haribhakti and McNeilly who can make the homebuying math work have some trends in their favor. For one, homes are taking longer to sell. On average, homes sold in 33 days of hitting the market in January, up from 19 days a year earlier, according to the National Association of Realtors.

That’s pushing some sellers to lower prices. In January, about 190,000 homes on the market had their price reduced, a nearly threefold increase from a year earlier, according to Realtor.com.

Many buyers are also increasingly opting for a mortgage rate buydown, which lowers the rate on their home loan for a few years or for the life of the loan and thus reduces the homebuyer’s overall borrowing costs. In exchange, buyers pay fees as part of their closing costs to cover the rate buydown.

Some sellers are even offering to cover those closing costs for a buyer to get the deal done.

Scott Collett, an account manager in Tampa, Florida, recently negotiated a seller-paid mortgage rate buydown to close the deal on a four-bedroom, two-bathroom house with a pool. The property, which had been on the market for nearly a year, was reduced from $495,000 to $419,000.

“I basically offered what they were asking at that point in time, as they paid all the closing costs and inspection fees and everything,” said Collett, 49.

The rate on his 30-year loan dropped from 6.25% to 5.26%, an improvement, but still higher than a year ago when rates averaged below 4%.

For Collett, it was worth it.

“My thought was that if I had a higher interest rate, I’d pay less for the house, but I could also refinance,” he said.