Record-high home prices combined with rising mortgage rates to push more buyers out of the market
Aug. 12, 2022 10:00 am ET
It was more expensive to buy a U.S. home in June than it has been for any month in more than three decades, as record-high home prices collided with a surge in mortgage rates.
The National Association of Realtors’ housing-affordability index, which factors in family incomes, mortgage rates and the sales price for existing single-family homes, fell to 98.5 in June, the association said Friday. That marked the lowest level since June 1989, when the index stood at 98.3.
Existing-home sales have declined for five straight months. During that period, interest rates shot up while home prices steadily climbed, leading to the sharpest erosion of affordability for the U.S. housing market in years and pricing more buyers out of the market. Even with fewer transactions, prices continue to rise from a year ago because the number of homes for sale around the U.S. remains below historical levels.
The drop in affordability makes it especially hard for first-time buyers to enter the market and access the main path for the U.S. middle class to build wealth. First-time buyers typically need to save up for a down payment and can’t benefit from selling a previous home.
Conditions have eased a bit in recent weeks. Mortgage rates hit a 13-year high in June but have ticked lower since. Some sidelined buyers re-entered the market in July and August, according to real-estate agents.
“Thankfully, the worst in affordability could already be over for this cycle,” said Lawrence Yun, NAR’s chief economist. “Mortgage rates have calmed down in recent weeks, and the consistent wage growth … is narrowing the gap with home-price growth.”
Existing-home prices have jumped 46% nationally in the past three years, according to NAR, fueled for much of that period by buyers seeking more space during the pandemic. Still, home buying remained relatively affordable in 2020 and 2021 because mortgage rates dropped to record lows, offsetting much of the price increases for buyers.
Despite forecasts for a cooling housing market in 2022, U.S. home prices are still hitting record highs, even with mortgage rates surging in recent months. WSJ’s Dion Rabouin explains what’s driving demand, evidence of a slowdown on the horizon, and what that could mean for the economy. Photo composite: Ryan TrefesTHE WALL STREET JOURNAL INTERACTIVE EDITION
Mortgage rates have climbed since the start of the year, rising to 5.22% this week from 3.1% at the end of 2021, according to mortgage-finance company Freddie Mac. Higher borrowing costs are partly due to the Federal Reserve’s aggressive efforts to tame inflation by lifting interest rates.
Now, price declines are more likely in some of the markets that showed the strongest price growth during the pandemic, such as Boise, Idaho, Austin, Texas, and Phoenix, housing economists say.
On a national basis, economists expect home-price growth to slow significantly by 2023, and some are forecasting small year-over-year price declines. Yet years of depressed new-home construction following the 2007-09 recession has left the housing market undersupplied, which is likely to prevent steeper price drops, some economists say.