It's getting tougher to purchase a home. According to the National Association of Realtors, their home affordability index dropped to its lowest level ever during the second quarter, a reading of 92.7 compared to 101.8 in the first quarter, and far lower than the 180.4 level recorded in 2021. An index reading of 100 means that an average family earns enough money to purchase a median-priced home, whereas a lower score suggests that the median income is insufficient. These figures date back to 1986.
Shockingly, the current housing affordability situation is worse than it was before the Great Financial Crisis. At that time, when lending regulations virtually disappeared, home prices dropped 33% from 2006 to 2009 (as per the S&P Case-Shiller 20-City home price index).Is this concerning?
The fall in housing affordability has been seriously impacted by the immense rise in mortgage rates, now reported at 7.2% by Freddie Mac. This is almost triple the level at the end of 2020/start of 2021, when they hit their lowest point of around 2.7%. It thus comes as no surprise that the first quarter of 2021 marked the highest in terms of housing affordability. In spite of ballooning interest rates and a 28% growth in housing prices, median household income hasn't experienced enough of an expansion to balance out inflation and home prices – resulting in the lowest level of housing affordability since 1986. That said, the limited availability of units, now with only 980,000 existing single-family homes on the market (the fewest since 1982), persists due to homeowners desiring to maintain their 3% mortgage rate while the trend of "work-from-home" also has an effect. Raising housing supply will take years as construction since the Great Financial Crisis hasn't kept up.
The Federal Reserve has made drastic improvements in lending standards and the typical homeowner has greater equity than before. It appears likely that inflation will settle to a permanent state of 2% or lower and interest rates will begin to come down in the near-term. But still, housing affordability remains low and there is a risk for first-time buyers of being denied the market. Can pricings stay at a high level in the face of rising financial costs or will a wave of supply disrupt the current state? If the central bank yields to pressure and reduces rates more quickly, it will be beneficial to affordability. In the end, the Fed's interest-rate hikes may prove powerful enough to restrain the economy, bring inflation to its target and possibly spark a recession. This, combined with other risks, will be taken into account by the Fed for a successful transition to long-term economic growth.
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