Rising Home Values and Interest Rates Threaten U.S. Housing Affordability
As the economy continues to improve, and wages are finally on the rise, a new challenge faces the real estate industry across the United States — affordability. Although housing remains affordable compared to long-term norms in many parts of the country, seven states are now less affordable than their long-term averages, with 12 more states verging on that mark.
What does this mean for home buyers and the brokers who represent them? If this trend continues, the current rate of home appreciation, combined with the Federal Reserve’s targeted interest rate hikes, threaten to put home ownership out of reach for many Americans.
Millennials, the demographic most ambivalent about becoming homeowners, may have already responded, pulling back from a three-year high in homeownership, from 36 percent in the final quarter of 2017 down to 35.3 percent in the first quarter of 2018. And there has been another reaction to the tightening market — slower growth in home prices for March, 2018, after record-breaking increases in January and February.
Three interdependent factors are contributing to the trend of lower affordability. The first is interest rates, which are up three-quarters of a percent since the beginning of the year alone. Combined with an annual home price appreciation rate increase of 6.5 percent, the higher interest rates boost the average cost of a 30-year monthly mortgage payment by $150, a 14 percent increase.
The second contributing factor is inventory. In the first quarter of 2018, the total number of homes on the market averaged 1.59 million, down 8.4 percent from the previous year. The housing crunch is the main factor driving the increase in home prices nationwide and fueling the trend toward lower affordability.
Finally, although incomes have been growing at a rate substantially higher than they were in the past — 4.37 percent annually in recent years, as opposed to a 2.75 percent average rate of wage growth over the past 25-year period — they are still not high enough to catch up with, let alone outpace, the rapid monthly home price appreciation rate.
There are both short- and longer-term implications for this trend. In the short term, it is time for brokers to get creative with clients who have been priced out of their target neighborhood, offering a wider range of properties, including distressed homes, and financing options.
Longer term, a reactionary drop in housing value could lead individuals who bought on the margin to default on their mortgages, increasing the number of foreclosures. Although foreclosures are currently 32 percent below their pre-recessionary average, the most recent data shows a 4 percent increase over the previous quarter, perhaps one more sign of changes on the horizon.
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