Declining Home Affordability Weighs on Buyers

Buying a Home Is Still Really Expensive

Low interest rates and rising salaries are not enough to offset soaring prices for homes, making it even more difficult for would-be buyers. As it stands, to purchase the median home in the US, a buyer would need about 32% of their income for the monthly mortgage payment. It marks the highest portion of income needed for a monthly mortgage payment since November 2008 when mortgages accounted for 34.2% of homeowners’ paychecks.

As of July, home prices set new highs for four months in a row. Higher home prices mean a bigger loan for buyers and thus larger mortgage payments each month. First-time buyers are expected to be impacted the most from declining home affordability—they will be forced to either shoulder larger monthly mortgages, purchase cheaper homes, or exit the real estate market until it cools off.

Homebuyers Look to New Locations

The lack of affordable homes is also prompting homebuyers to purchase in areas they may not have considered in the past. For example, homebuyers who are shut out of the suburbs of New York City are setting their sights on New Jersey’s Hudson County, home to Hoboken and Jersey City. Through the middle of September, sales in those areas increased 35% compared to a year ago. Across New Jersey, home deals are only up 1% in the same timeframe.

The pandemic drove buyers out of the cities and into the suburbs as they sought more space to work and learn remotely. But with home prices soaring and inventory low, homebuyers are looking beyond the more popular suburbs in their areas.

Low Interest Rates Can’t Offset Costs of Owning a Home

Home affordability has dropped over the course of 2021. At the start of the year, homebuyers needed roughly 29% of their income to pay their monthly mortgage. That jumped to 32% by July. The increase has erased any benefits borrowers would get from record-low interest rates.

Homebuyers appear to be recognizing this. A Fannie Mae survey from August found that 63% of consumers said it was not a good time to purchase a home. That is up from 35% a year earlier.

Low interest rates and a desire to get out of cities during the pandemic spurred a huge boom in the real estate market. Those high prices may come down a bit as we head into the winter months.

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