Home affordability hits lowest level since 2006

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Experts are divided on what that means for the housing market

Many Americans who could afford a home purchase a year ago no longer can. The average home price has surged over the last 12 months, with the average mortgage rate nearly doubling since January.

In its latest report, the National Association of Realtors (NAR) put home affordability at its lowest level since 2006, the peak year of the housing bubble. The organization said its housing affordability index fell to 102.5 in May, the lowest since it hit 100.5 in July 2006. The affordability index incorporates median existing-home prices, median family incomes, and average mortgage rates.

With fewer people able to afford homes, what will that do to the housing market? Will sales fall and pull down record-high prices at the same time? ConsumerAffairs asked a number of industry experts to weigh in on those questions, and as you’ll see, there is no clear consensus.

Not much change

Glenn Phillips, CEO of Lake Homes Realty in Birmingham, Ala., doesn’t expect a significant adjustment to the housing market.

“The demand for homes has so greatly exceeded available homes for sale, there will still be more buyers than sellers in the coming months, and even through 2023 and 2024,” he told us. “There is not sufficient new home construction to completely balance the market, even with increases in mortgage rates.”

But in the New York City housing market, Mike Biryla, a real estate agent at Triplemint, is already seeing signs of a market slowdown, with fewer buyers willing or able to take on today’s much higher mortgage payments.

“My prediction for home prices through 2022 will be a continuation of a market correction,” Biryla said. “The Fed’s intentionally increasing the interest rates to cool down the housing market is a much different scenario than the 2008 financial crisis, and even with the interest rates potentially climbing even more through 2022, lenders have been more careful and will likely see fewer foreclosures.”

So, the decline in home prices should be more orderly than it was more than a decade ago. Biryla expects that home prices will continue to depreciate as interest rates climb and inventory increases.

Shmuel Shayowitz, president and chief lending officer at Approved Funding, agrees that the housing market will respond to the Fed’s actions. In fact, he says the Fed is specifically targeting the housing market as a chief source of inflation.

“Their action will and is slowing the housing market and will soften prices,” Shayowitz told ConsumerAffairs. “This however will not lead to a market crash in housing and will likely cause a correction of 0% to 5% at worse.”

“I do not expect widespread price reductions as it varies by market and neighborhood,” Michael Gifford, CEO & co-founder of Splitero, told us.”Price reductions usually happen when sellers have a high price expectation, demand drops, or the seller is very motivated to sell. In this market, seller motivation is still low because relocating is difficult.” 

With declining affordability, Ran Eliasaf, founder and managing partner of Northwind Group in New York, is already seeing a drop in demand for homes. He says there have been fewer offers and not as many showings lately, but tight inventory levels will continue to favor sellers.

“Overall there is still a housing shortage across the U.S.,” he said. “This shortage will help initially keep pricing levels at their current status. However, a continued rise in interest rates, coupled with stagnation in wage increases will have a negative effect on the housing market, with many potential buyers opting to rent as the cost of rent will be lower than the cost of ownership.”

In fact, Sissy Lappin, co-founder of ListingDoor, says the decline in the number of buyers probably won’t affect the market all that much. She predicts that higher interest rates will also result in fewer sellers and that current homeowners won’t want to give up their low mortgage rates.

“Think about it; 90%, or nine out of 10 mortgages, have an interest rate below 5%,” she told ConsumerAffairs. “This means that instead of jettisoning that mortgage, they will stay put.”

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