The housing market in the United States is currently experiencing its most unaffordable period since the 1980s, according to a recent report. The report, conducted by Intercontinental Exchange (ICE), highlights the impact of soaring mortgage rates on homebuyers.
In October, the monthly principal and interest payment on a median-priced home reached a record high. Excluding taxes, insurance, and homeowners association fees, this payment exceeded $2,500 for the first time since 1975 when data tracking began. Compared to the previous month, this payment increased by $144.
Over the past two years, the typical monthly principal and interest payment has risen by $1,240 – a staggering 94% increase. As of November 2nd, the average rate on a 30-year fixed-rate mortgage was 7.76% according to Freddie Mac.
This rise in housing costs has resulted in a significant burden for households. On average, the principal and interest payment now represents around 41% of their income. This marks a substantial shift from the past 35 years when households typically needed less than 25% of their income to cover their P&I payments.
Andy Walden, Vice President of Enterprise Research at ICE, commented on the affordability crisis, stating that it is not solely due to interest rates. Walden compares the current situation to the 1980s, when affordability was also a concern. However, during that time, interest rates were in double digits and the average home cost around 3.5 times the median income. In contrast, today’s price-to-income ratio stands at nearly 6-to-1.
As homebuyers face these challenging market conditions reminiscent of the 1980s, finding affordable housing has become increasingly difficult.
Home Prices Cooling in Most Markets
According to Freddie Mac data, back in October 1984, the 30-year mortgage rate was averaging at a staggering 14%. This was during a period of high rates known as the “Volcker era,” when Paul Volcker, the chairman of the Federal Reserve from 1979 to 1987, raised real interest rates to combat inflation, despite facing criticism.
During this time, baby boomers were in their prime home-buying years and ended up purchasing homes with mortgage rates exceeding 15%. As rates gradually fell over the years, many chose to refinance their homes. However, the Fed once again raised rates in June 2022, causing affordability to hit a 39-year low and the market to face challenges.
According to recent analysis by ICE, a return to more affordable housing would require one of three scenarios. Either the 30-year mortgage rate needs to decrease by 4.4 percentage points, the median household income must increase by 62%, or home prices need to fall by 38%. However, the report acknowledges that these solutions are not likely to resolve the current challenges on their own and tend to have interdependent effects.
Signs of Slowdown in Home Prices
Although home prices experienced growth in September, ICE anticipates a slowdown in the coming months. In September, prices rose by 4.3% compared to the previous year. However, there are indicators of cooling in the market, with the weakest monthly gain since January recorded at only 0.39%. Out of the 50 largest U.S. markets, home prices cooled in all but one city: Cleveland.
The most significant price declines were observed in Austin and New Orleans, with decreases of 0.31% and 0.14% respectively. In contrast, the most affordable market was Cleveland, where the monthly principal and interest (P&I) payment accounted for 25.5% of a household’s income. Oklahoma City and Pittsburgh secured second and third place in terms of affordability.
On the other end of the spectrum, Los Angeles was deemed the least affordable market, with the housing payment amounting to 76.5% of a household’s income. San Diego and San Jose ranked second and third in terms of unaffordability.
It is expected that these cooling trends will persist, potentially leading to a slowdown in home prices later in 2023.