Mortgage rates have fallen, but are homes more affordable?
Mortgage rates have fallen, but are homes more affordable?
We’ve been getting a lot of data on the housing front recently. Last week, we learned that the number of existing homes sold in February rose 9.5% from January, according to the National Association of Realtors.
And Monday, we learned that while the number of new homes sold in February fell slightly from the month before, sales were still almost 6% higher than they were this time last year, according to the Commerce Department.
More home sales certainly seems like good news for a housing market that’s been sluggish, to say the least. But that doesn’t necessarily mean that homes are any more affordable.
There is some good news on housing affordability. Mortgage rates are down almost a full percentage point from October of last year.
But … I think you know where I’m going with this.
“You know, when you zoom out, affordability is still very, very low from a historical perspective,” said Odeta Kushi, deputy chief economist at First American Financial Corp.
She looks at affordability as a factor of home prices, mortgage rates and household incomes. And even though incomes have been rising, “the rise in household income has not been enough to offset the impact from rising mortgage rates and higher house prices,” Kushi said.
If you take mortgage rates, housing prices and incomes into account, homes are 44% less affordable than they were two years ago — before the Federal Reserve started raising interest rates, she said.
And even if people’s incomes rise further?
“The problem is that home price appreciation is likely to continue, probably a little bit quicker than income growth,” said Charlie Dougherty, senior economist at Wells Fargo.
The big issue here, Dougherty said, is housing supply. There still just aren’t enough homes to meet demand. That said, the supply picture isn’t quite as bad as it was last year.
“So more supply is starting to come to market,” Dougherty said. “I think actually, lower mortgage rates helps explain that.”
That’s because homeowners are more willing to sell if they can find a decent rate for another home.
That could help to slow down home price appreciation, said Chen Zhao, who leads the economics team at Redfin.
“So I’m not saying that prices will fall, but I do think that prices may become more flat than we have seen in the last couple of years,” she said.
Zhao said homebuilders have also been offering to buy down people’s mortgage rates. They’re also focusing more on building homes that are within reach. Think: fewer square feet.
“So that’s good news for buyers, right? There’s more affordable homes on the market. But the catch is that you’re getting a smaller home,” she said.
And all these little bonuses, Zhao said, are not going to solve the affordability problem. You can think of them more like bandages.
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