This is how quickly affordability deteriorated this year for first-time buyers: their monthly mortgage payment is almost 60% higher than in January.
At the start of the year, the payment for a median-price home was $1,443 after a 10% drop. Now it’s $2,285, or $842 per month more, according to calculations Realtor.com provided exclusively to Yahoo Finance. The payment now costs 30.2% of a buyer’s monthly household income, or nearly 50% more than it did in January, when it took up just 20.3% of their income.
The story is the same for those who have made a larger down payment, thanks to rapidly rising mortgage rates and increased house prices. While those factors have dampened some in recent weeks — mortgage payments peaked in late October — affordability is likely to remain a major challenge in 2023.
“It will take time for the housing market to stabilize,” Danielle Hale, Realtor.com chief economist, told Yahoo Finance. “Either mortgage rates need to soften a little, or incomes need to go up, or prices need to be corrected a little bit to bring affordability back to something that would be more accessible.”
‘Buyers had sticker shock’
About a year ago, economists expected the average interest rate on 30-year mortgages to reach 4% this year. After starting at 3.22% in January, the rate peaked at 7% in early November, in what Freddie Mac economists characterized as “the biggest early-year jump in more than 50 years.”
In June alone, the rate rose from 5.23% to 5.78% in one week. The increase of more than half a point was the largest one-week increase since 1987.
“At one point I had about 10 people pull out of purchase plans within two weeks just because of a change in rates,” Jason Sharon, owner and broker at Home Loans Inc., told Yahoo Finance.
The unprecedented pace of rate hikes – driven by the Federal Reserve’s battle against inflation – has been the Achilles’ heel of the housing market. For homebuyers across the country, each percentage increase eroded their purchasing power by tens of thousands of dollars.
“Affordability has gone $150,000 the wrong way,” Scott Sheldon, affiliate manager at New American Funding, told Yahoo Finance. “Someone who qualified for a $600,000 house in January can now only buy a house priced between $420,000 and $430,000 … It’s been a major blow to people’s bottom line.”
So many buyers simply left the market.
According to the latest figures from the Mortgage Bankers Association, mortgage applications for a purchase were down 36% year-on-year in mid-December, and demand is likely to remain low as buyers face higher borrowing costs.
“Potential buyers had sticker shock in 2022,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told Yahoo Finance. “At the beginning of the year, they thought they knew what it took to buy a house. Then they went into the market and because of the increase in rates, they found out that the payment was much, much higher.
‘House market 2023 could be a nobody’s market’
As mortgage rates rose this year, so did home prices, further crushing homebuyers’ budgets.
The median home price rose from $369,900 in January to a peak of $449,000 in June — a 21% increase, according to Realtor.com. While home prices have since fallen to $405,000 in December, that’s still nearly 10% more since January and out of reach for many buyers, especially with rates at 6.42%.
According to the National Association of Homebuilders, only 42.2% of new and existing homes sold between July and September were affordable for households with a median income of $90,000. That’s the lowest share since the Great Recession.
“The overall market is starting to show signs that we can’t really support 7% mortgages anymore,” Sheldon said.
If sellers don’t adjust their price expectations and mortgage rates don’t move from 7% next year, affordability for homebuyers could remain at its worst level since 1985, say economists at independent research firm Capital Economics.
So far, however, it seems that the sellers who remain in the market are getting the message.
The share of homes with a price cut rose to 19.6% in November, compared to 9.2% a year earlier, data from Realtor.com showed. According to the NAHB, about 35% of builders also lowered their listing prices in December, slightly down from 36% the previous month.
“After being overwhelmed by the housing frenzy of the recent past, homeowners, sellers, buyers and renters may be in awe in 2023,” Hale said in a statement. “The 2023 housing market could become a ‘no-man’s market’, not friendly to buyers or sellers.”
Gabriella is a personal financial reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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