The run-up in housing prices and the highest mortgage rates in more than 20 years are creating a housing affordability crisis. Many people are caught between the proverbial rock and a hard place: Unaffordable rent and (potentially) an even more unaffordable purchase.
My neighbors (a husband, wife, and two young children) have been renting a house for the past year while trying to save money for a downpayment. Their landlord recently told them he is raising their rent by $200 per month, a 12% increase. With no cheaper rentals available, they've decided to buy a house — despite high prices and high rates.
Unfortunately, they haven't amassed much for a downpayment — maybe 5%. Taking on a large home loan will add to their already substantial debt load from school loans. Making the monthly payments will be a stretch, but they think they can make it work. I hope so.
Tough choices
The situation described above isn't hypothetical. It's one real-world example among millions that are similar. People who must make housing decisions right now — because of rising rent, end-of-lease situations, or unavoidable relocations — have no good options.
A Moody's Analytics graph (data through the end of June) shows apartment rents rising as a percentage of median gross income. (I couldn't find specific data on house rentals, but I suspect the trend is similar.)
From "Which Metros Saw the Most Housing Affordability Relief in the First Half of the Year?"
(Moody's Analytics, Aug. 4, 2023).
Those who decide to buy instead of renting face an increasingly difficult affordability climate too, as documented last week by Charlie Bilello of the wealth management firm Creative Planning.
3 years ago: 30-yr mortgage rate was 2.91% & median existing home price in the US was $306k.
— Charlie Bilello (@charliebilello) August 25, 2023
Today: 30-yr mortgage rate is 7.23% & median home price is $407k.
Result: $20k increase in down payment (20% down) and 117% increase in monthly payment (from $1,020 to $2,216).
Bilello's research provides a jarring snapshot of the impact that higher rates and higher prices are having on people trying to buy homes right now.
Worse before it gets better?
According to economist Joel Kan of the Mortgage Bankers Association, the one-two punch of rising prices and higher rates is dissuading many people from buying.
"Applications for home purchase mortgages [in mid-August] dropped to their lowest level since April 1995, as homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power.
"Low housing supply is also keeping home prices high in many markets, adding to the affordability hurdles buyers are facing."
Not to pile on the gloom and doom, but mortgage rates could go higher still. From CNN:
Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed's actions, what the Fed actually does, and investors' reactions. [Fed Chairman Jerome Powell reiterated last week that the Fed is "prepared" to raise short-term rates further.]
When Treasury yields go up, so do mortgage rates.
[According to Melissa Cohn, regional vice president at William Raveis Mortgage, the] market is pricing in the potential for another rate hike, and there is a fair amount of risk in the economy.... Lenders are taking note of that risk, keeping rates higher. "The banks are protecting themselves," she said. "Banks are trying to protect their bottom line."...
Unfortunately for home buyers, rates could go higher and are expected to stay elevated, said Cohn.
Keep in mind that banks remain jittery following the collapse of three U.S. regional banks earlier this year.
What to do?
There are no easy answers for people needing housing right now. And it's particularly frustrating that government and Fed policies have fostered the affordability crisis.
But setting aside policy questions for another day, what advice would you give to a couple or a family needing affordable housing right now? Better to rent? To buy? Are there other creative solutions?
