Potential homebuyers leave properties for sale during an open house at a community in Clarksburg, Maryland, on September 3, 2023.
Roberto Schmidt | AFP | Getty Images
It’s no secret that the real estate market looks very different than it did just a few years ago.
While soaring mortgage rates and home prices have eroded consumer purchasing power, low supply has kept the market competitive. As a result, affordability has plummeted since the early days of the pandemic.
These six diagrams help explain what this unique moment looks like and what it means to you:
30-year mortgage rates are a popular choice for homebuyer financing and are key to understanding the market. The interest rate is essentially the cost of borrowing associated with financing the purchase of a home. In fact, the higher the interest rate, the more interest payable on your home loan.
The rate has hovered around 7% over the past few months. While it has cooled somewhat after hitting 8% late last year, it is still well above the sub-3% rates consumers might have locked in during the early years of the pandemic.
Housing prices are also an important factor in Americans’ daily decisions about how much to spend or whether they can afford it. Case-Shiller National Home Price Index calculated by S&P Dow Jones Indices hit record high This year.
High prices evoke different feelings among different groups. For hopeful homeowners, this could raise red flags that they are planning to buy at the wrong time. But current owners have reason to celebrate, as it could mean their own property values have risen.
With mortgages and prices rising, it’s no surprise that affordability is down compared to the early days of the pandemic.
There are several different interpretations of affordability that paint a similar picture. One from the National Association of Realtors It was found that affordability fell by more than 33% between 2021 and 2023 alone.
Federal Reserve Bank of Atlanta Measurement It shows that compared with the peak of the epidemic in the summer of 2020, the economic feasibility of buying a home fell by more than 36% in April.
Another way the Atlanta Fed tracks this is through the share of income the typical American needs to afford the median home. Nationally, they were ultimately required to pay 43% of wages, well above the 30% affordability threshold. Since mid-2021, this proportion has been considered unaffordable, at over 30%.
The Atlanta Fed also revealed the reasons for the current lack of affordability. While significant wage increases in recent years have helped keep wallets flush, the bank found that the negative impact of rising interest rates and sticker prices far outweighed the benefits of higher pay.
While mortgage rates are currently high, a team at federal housing finance agency Only a handful of borrowers were found to be actually locked in at such high levels.
FHFA found that nearly 98% of mortgages had interest rates below the average rate in the fourth quarter of last year. Nearly 69% had a rate 3 percentage points below the average.
There are two main reasons why such a small share pays the prevailing rate. Most obviously, the housing market, which was hot when interest rates were low, has cooled significantly during the current period of higher borrowing costs.
Another answer is the race to refinance early in the pandemic when interest rates were below or close to 3%. This allows those who are already homeowners to take advantage of these relatively lower levels.
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