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Are Rising Home Prices Creating a Housing affordability Crisis?

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Are you feeling squeezed by rising housing costs? You're not alone. According to a new analysis by Zillow, the share of income required to afford a mortgage has risen to 30.2%. That's well above the established norm of 22.8% of a homeowner's income. If these trends continue, we could be facing a housing affordability crisis in the near future.

To put that into context, a family earning $150,000 per year has seen would be mortgage costs increase 32% from $2,850 to $3,775. To bring those costs back in line with more traditional costs, home values would have to decrease by nearly 25%, or mortgage rates would have to return to where they were before the Federal Reserve began its war on inflation.

Zillow Senior Economist Nicole Bachaud adds some perspective to this challenge in a recent statement, “Inventory remains tight, real income growth is dismal, mortgage rates show no signs of dropping, and there is plenty of pent-up demand ready to bid prices back up if they reach a level would-be buyers can once again afford. Filling the housing deficit is the key to long-term affordability, but the recent slowdown in single-family construction is not a good sign that the market is getting closer to building enough to meet demand.”


Factors at Play

The most likely way to improve affordability is through lower prices, lower rates, higher incomes, or a combination of some sort between these factors. While home values are trending down slowly, don't expect there to be a surge in the home listings inventory, as the higher costs are discouraging many homeowners from listing their homes. These homeowners are facing the same higher costs as buyers, and right now, staying put with a lower payment is more appealing to them than selling and buying another home with a higher mortgage rate.

This brings us to another factor that could improve affordability - lower mortgage rates. The challenge here is that as soon as there's any significant reduction in rates, the housing market will likely take off again. Waiting for rates seems like a trap for buyers. If rates go up, affordability will go down, if rates go down, home values will go up, and there will be more competition even to get a contract accepted.

The third factor is income, and in a high-inflation environment, you'd expect incomes to rise as employers compete to keep high-value workers and hope they can pass higher costs along to their consumers. So, incomes could provide some affordability relief, but a significant recession with job market contraction could bring incomes down, making affordability worse.

Bottom Line

In strong job market areas, chronic undersupply of homes will be a persistent challenge for the foreseeable future. Higher mortgage rates will make supply even lower. Lower rates will make prices take off again. Buyers will turn to adjustable-rate mortgages and other strategic financing options to help alleviate affordability concerns. Employers will raise wages. Therefore, in these markets, prices will likely be neutral or trade within a -5% - +5% range.

In second home/vacation home/weak job markets, you should see significant price reductions because worsening economic conditions won't be able to support the market value, and there's no underlying buyer demand. You could also see some older Baby Boomers start to liquidate these homes if they sense the value dropping significantly.

Wondering what to do or what's right for you? Reach out for a personal market evaluation so you can make sound decisions based on sound data.