First-Time Homebuyer Affordability Issues

During the pandemic era of the real estate market, we saw many people become first-time homebuyers. In fact, first-time homebuyers made up a strong percentage of the buyers during the pandemic. However, as the post-pandemic economy has ticked up, home prices have increased alongside a recent rise in mortgage rates. Mortgage rates have soared to start 2022, and only look to continue an increase across the year. With mortgage rates, inflation, buyer demand, and supply all remaining problematic as a whole, the housing market is in for a ride. Here is why there are first-time homebuyer affordability issues.

First Time Homebuyer Affordability

Throughout the United States, most markets are dealing with a supply crunch. It is getting quite difficult to find a home nowadays, and many buyers are beginning to realize it might not be in their cards. Affordability has been in question for months now, preceding mortgage rate increases. However, now that mortgage rates have soared in 2022, affordability just got worse.

In fact, for first-time homebuyers, affordability has reached a 3-year low. The last time first-time homebuyer affordability was this low was during the last Federal Reserve monetary tightening period in 2018. First-time homebuyers have seen their mortgage payments jump to a whopping 25.6% of annual household income. This is for the fourth-quarter of 2021. Expect to see this number increase when the data becomes available for 2022. This is the worst levels of affordability since well before the pandemic. According to the National Association of Realtors (NAR), the same metric was as low as 22.4% the prior year.

Mortgage Rates And Home Prices

Following a surge in home prices and loan amounts, we have seen mortgage payments on a monthly basis increase. According to NAR, rising mortgage rates, which are up to 3.84% as of February 9th, 2022, mortgage payments increased by about $200 a month. Another part of the NAR report mentioned the increase in purchase prices in 2021. Single-family home prices rose by 14.6% in the fourth quarter of 2021, compared to the prior year. The average price of a single-family home rose to $361,700. This is a slightly lower price acceleration than we saw the prior year, which was 15.9%.

Not to mention, housing inventory reached a record low in the fourth quarter of 2021. According to S&P Shiller Housing Index, there is 29% less homes on the market than 2021. The most surprising number of all is that housing inventory is down 50% since the pandemic ravaged markets in 2020. Low inventory leads to rising prices as housing becomes a scarcity commodity. Higher prices and higher mortgage rates have led to the affordability issues for first-time homebuyers.

Affordability Overview

The entire country is facing an affordability squeeze in many different categories. Not only are home prices skyrocketing, but the prices of goods and services has reached a 40-year high. According to the CPI number released on February 10, 2022, prices of goods were up 7.5% on average year-over-year. This topped expert predictions by .2%, and is setting the stage for even higher mortgage rates by years end.

Many of the metropolitan areas that are tracked by NAR and realtor.com saw price increases. In fact, over 2/3rds of these areas were seeing double-digit price increases in a year.

“The escalating prices took a toll on home shoppers, compelling many to come up with extra cash and forcing others to delay making a purchase altogether,” said Lawrence Yun, NAR’s chief economist. “A number of families, especially would-be first-time buyers, are increasingly being forced out of the market, and this is why supply is critical.”

Source: Bloomberg