Many homebuyers have reappeared this spring after being inactive over the winter. But that doesn’t mean housing is affordable again.
“We’re still not in normal affordability right now,” Chris Porter, chief demographer at John Burns Research and Consulting, told Yahoo Finance Live (video above). “People are still spending more of their income on housing than they ever have.”
“The way you get affordability back in check is one of three ways: either you raise incomes, or you lower rates, or you lower house prices,” he said.
While Porter said incomes continue to grow fairly solidly, the other two avenues — mortgage rates and house prices — are the bottlenecks.
Mortgage rates need to be lower
Price-conscious buyers are very sensitive to rates. This was clear in the latest mortgage application data after rates softened a bit.
The volume of purchase requests saw its largest weekly increase in three months, according to the Mortgage Bankers Association (MBA) for the week ending June 14. Overall, buying activity jumped 17% week-over-week on an unadjusted basis.
The rate on the 30-year fixed-rate mortgage fell to 6.69% this week, according to Freddie Mac, from 6.71% the previous week. Still, rates have hovered between 6% and 7% for most of the year, keeping buyers on high alert for any kind of decline.
A hint of good news is that new economic data is showing a slowdown in inflation. That helped cement the Federal Reserve’s decision this week to pause its aggressive rate hike campaign.
The pause means mortgage rates could stay flat, some experts previously told Yahoo Finance, unless something big happens in the economy.
“I don’t think we’re going to go back down to 3% rates anytime soon,” Porter said. “As indicated today in the Fed’s announcement, we’re not going to see the fed funds rate come down anytime soon. Mortgage rates are going to stay high beyond what people have been accustomed to in the past. over the past few years.”
Homebuilders have used mortgage rates to their advantage with their finance arms offering buyouts to buyers who need a lower rate, Porter said.
Builders also have an advantage due to inventory issues. According to the National Association of Home Builders, 33% of homes on the market were new construction, while that share was typically 12.7% between 2000 and 2019.
“New construction has really been able to step in and take up a bigger chunk of inventory available for sale,” Porter said. “And that’s why you see builders doing pretty well right now.”
Still, according to Porter’s calculations, at least 17.1 million more new homes need to be built over the next decade to meet growing demand. But construction isn’t going to happen overnight, and he predicts a slight slowdown in single-family construction over the next two years.
The other big inventory problem is the lack of previously owned homes for sale. Homeowners are hesitant to list their current home and give up their current low mortgage rate.
“We have pretty strong demand for housing, the challenge is just that the supply isn’t there, especially on the resale side,” Porter said. “We’re at very low levels of resale supply. That’s actually created a bit of a floor on the price drop, at least temporarily.”
The few owners selling in today’s market know they have the upper hand.
The median price of a single-family home rose to $454,900 for the week ending June 12, according to Altos Research, from $450,000 the previous week. Prices for newly pending home sales also edged up this week by 1% to $384,000.
These types of prices are unaffordable for many potential buyers.
“[We’re] going to see less short-term household formation until people feel affordability is in their favor,” Porter said, “and they can buy a home.”
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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