Hopeful homebuyers feel the affordability squeeze

11/02/2023 — With mortgage rates surging, home prices overheating, and affordability dwindling, it’s not surprising to find dampened sentiment in the housing market and adjusted expectations among homebuyers. For example, home prices have increased 45% since February 2020, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. Moreover, interest rates are averaging over 8% nationally for a 30-year fixed-rate mortgage. A homebuyer making a 20% down payment on a $400,000 home would pay almost $1,000 more per month today than two years ago – a chilling reality for many prospective homeowners.

Additionally, mortgage purchase applications dipped to their lowest level since 1995, likely due to a lack of inventory. Many current homeowners aren’t keen to sell in today’s market, despite the elevated prices, because their next mortgage would be at a higher rate, a phenomenon known as the "golden handcuff effect." Fewer resale transactions are occurring today than during the 2008 housing crash, which has meant limited inventory and further pressure on affordability.

Investors should monitor homebuilder margins and housing’s potential impact on inflation. The trend of homebuilders enticing buyers with mortgage-rate buydowns and offering better discounts than sellers are willing to offer in the resale market might eventually impact homebuilder margins, especially with rates hovering at the 8% level. Regarding the inflation impact, if buying a home continues to be more expensive than renting, this might put upward pressure on inflation – a terrible omen for potential Federal Reserve policy.

Making informed investment decisions requires an understanding of the nuances of a particular market or investment product, whether it’s housing or another sector. Guidance from a financial professional can help explain market subtleties and aid investors in reaching their long-term goals.