Housing Affordability Squeeze

With the current landscape of the real estate market, many homebuyers are having a hard time finding a place to call home. While it may be hard to find a home now, a few experts predict that relief is not on the way. In fact, it could be even harder to break the homeownership barrier coming into the end of the year. The housing market looks to get even tighter, as demand is still high while supply is years behind. Here is why we are seeing a housing affordability squeeze.

Housing Affordability From Experts

According to Bank Of America’s Global Research by Economist Alexander Lin and Jeseo Park, affordability in forms of home prices and down payments are the worst it has ever been. The price to enter a home, known as one of the few barriers to entry, has skyrocketed to levels that very few everyday people can actually afford. Even while consumers are being hurt by prices, rates, and down payments, there is still overwhelming interest to buy. However, there is more uncertainty now than before, which can cause problems when it comes time to pull the trigger on a home.

There are three big aspects to emerge in their report about affordability. Higher mortgage rates were the first one, as higher rates are here to stay. While it is still better to own than rent, it is becoming more of a challenge to do so with higher rates eating at your purchasing power. Supply chain issues and home prices were the two other themes, as supply issues lead to lower supply of homes.

Housing Affordability Squeeze

Housing Affordability Based On A Portion Of Income From Americans In 2019 to 2021

Higher Mortgage Rates

With higher mortgage rates becoming the new “normal” for 2022, buyers need to be prepared. Mortgage rates have ticked up quickly in the beginning of the year, reaching over 4.22% this year. This is a while percentage point higher than they were in December 2021. Because of the massive surge in mortgage rates, experts predict to see the affordability index to fall even more. Another aspect of higher rates that often is forgotten comes from sellers. Many homeowners who were on the fence of moving will now be more reluctant to list because it will be expensive to move. A lot of these homeowners have low rates locked in, either from buying or refinancing.

Home Prices And Housing Affordability

Home prices have shot up, leading people to believe that renting is their best option. However, that is not the case. Rents have also increased, and in some market, outpaced the price appreciation of homes. Rents have increased by over 15% nationally, and some 30-40% in certain markets. This raises the question of should I buy or should I rent? Well, as housing costs continue to increase as part of the household budget, it is important to remember one thing. Buying a home allows you to lock in a monthly payment for 30 years. Renting does not allow this. In fact, when renting, you can pay 20% more a month every time you sign a new lease. This creates a challenging time for renters as they are not able to begin budgeting to save for a down payment.

Supply Chain

Finally, the supply of housing and other supply chain issues are leading to affordability issues. The biggest issue that we have seen in the real estate market recently has to be the supply problem. Even before mortgage rates increased, supply was still at an all time low in terms of active listings. And, not to mention, homes were being listed less often than ever before. Builders are struggling to find materials, like garage doors, windows, and doors. Now, because of geopolitical events, supply chains will be impacted more. With home prices expected to rise by 10% in 2022 now, the supply chain could be half the reason.