The US housing market is brutal, and it could be a decade or more before things return to normal.
In a new report, Redfin outlined several scenarios for housing affordability over the coming decade. Assuming that mortgage rates stay at their current level and home prices keep rising at their current pace, affordability is unlikely to return to “normal” levels for at least the next 10 years, analysts at the real estate company wrote.
Redfin said it defines “normal” affordability as the average mortgage payment-to-income ratio falling back to 30%, referring to the common guidance of keeping housing costs under 30% of your gross income. In the scenario above, researchers assumed that mortgage rates would stay in the 7%-8% range and that home prices would continue to grow 2.1% a year.
The firm described the situation as possible, but “unlikely,” since it would be difficult for home prices to maintain their current pace of growth if rates remained around their current range.
In the aggregate, the housing market hasn’t met that 30% mortgage payment-to-income threshold since August 2018, when interest rates were low and the Fed kicked off a brief rate-hike cycle that pushed mortgage costs higher.
The housing market could return to “normal” affordability sooner, assuming the US sees modest changes in interest rates or prices, Redfin said. One of the firm’s most optimistic scenarios has mortgage rates falling back to 6% while home prices remain flat, leading the average mortgage payment-to-income ratio to decline to 30% as soon as 2029, Redfin estimated.
Mortgage rates have spiked recently, thanks to the surge in bond yields and expectations for the Fed to hike rates to get a handle on inflation. The average 30-year fixed mortgage rate clocked in at 7.4% the last week, according to Freddie Mac, its highest level in about three years.
Home prices, meanwhile, remain near record-highs at the national level, attesting to tight supply overall. The S&P Cotality Case-Shiller US National Home Price Index rose to a record 337 in July, up 84% over the last decade.
“Many house hunters feel stuck between two bad options: Stretch themselves to buy at today’s rates, or wait for lower rates only to see prices climb further out of reach,” Asad Khan, a senior economist at Redfin wrote in the note.
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There are signs that housing is tilting more in favor of buyers as home sales. Around 45% of home sales in August involved sellers offering buyers concessions, and 16% of sales involved sellers offering buyers concessions and a price cut, a previous Redfin analysis found.
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