As mortgage rates hit two-decade highs in October and for a significant part of November, home affordability remained at its lowest level in more than 10 years, according to the the National Association of Home Builders (NAHB).
Interest on a home loan hovered at or around 8 percent in the fall of 2023 but property prices remained high. This meant that for households earning a median income of a little over $96,000, many homes were priced beyond their reach.
The NAHB pointed out that about 38 percent of homes sold towards the end of last year were affordable for median-earning Americans, about the same number compared to the previous quarter, which was the lowest since 2012.
But rates have declined since then to current levels in the mid-6 percent range, which could improve the ability of median-earning Americans to afford to buy a home.
“Affordability conditions should show some gradual improvement this year, as mortgage rates peaked in the fourth quarter of 2023 and are now well below 7 percent,” NAHB Chairman Alicia Huey said in a note.
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Certain dynamics in the housing market may still make it tough for prospective buyers, the NAHB said. The cost of construction remains high and a shortage of workers in the sector is also an issue, it said, which could impact the pricing of homes for sale.
Prices did drop in the fourth quarter to $375,000 from $388,000 in the previous quarter
Housing costs are putting a squeeze on pocket books of Americans, as they contributed more than half of the increase in inflation in the latest Consumer Price Index, NAHB Chief Economist Robert Dietz pointed out.
“Even as overall inflation continues to moderate, shelter costs continue to put upward pressure on inflation, accounting for more than half the inflation gains in the latest Consumer Price Index,” Dietz said in a statement. “The best way to tame shelter inflation and address America’s housing affordability challenges is to enact policies that reduce regulatory costs to help builders increase the supply of housing.”
Dietz told Newsweek that cooling inflation could lead to the Federal Reserve to cut rates. Policymakers had raised borrowing costs to their highest level in two decades to battle soaring prices. Their anticipated slashing of interest rates this year may lead to a fall in home loan costs as well, he said. This, in turn, will help in the affordability equation with rates falling closer to 6 percent by the end of the year, according to Dietz.
“This will price-in some prospective home buyers who were priced out of the market due to elevated interest rates in 2022 and 2023,” he told Newsweek.
For those buyers looking for an affordable alternative, the Midwest is a housing market that offers options for buyers. Four of the top five affordable markets were from Michigan, Indiana and Ohio. Meanwhile, the least affordable markets were in California, according to the NAHB.
Experts have said that affordability issues in the housing market are mainly due to a lack of enough supply of homes available for sale. This intensifies competition among buyers, which then pushes up prices. The U.S. is four million homes short of meeting demand, according to housing economists.
“Affordability in the housing market is an ongoing issue due to continued high home prices, elevated mortgage rates and low supply of homes on the market, particularly for first-time and low-income homebuyers,” Sam Khater, Freddie Mac’s chief economist, said last week.
NAHB’s Dietz pointed out that insufficient home construction over the last decade had hurt the housing market. Labor shortages, a scarcity of lots for building new homes and a rise in costs in the sector have all contributed to the slowdown in the supply of homes to the market.
“To achieve sustainable improvements for housing affordability over the next 5 to 10 years, we must enact policies that will make significant improvements on all of these supply-side challenges that are restricting home builder activity,” he said. “If we don’t, the homeownership rate will decline.”
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.