Housing Blues Continue to Play: Unaffordable Mortgages

‘A typical U.S. first-time buyer now finds that owning a home is too expensive,’ according to S&P Global Ratings.

Soaring home prices and mortgage rates, along with a lack of supply, have hammered the hopes of many potential home buyers, and the outlook remains bleak.

Just ask Beth Ann Bovino, chief North American economist for S&P Global Ratings.

“We think a typical U.S. first-time buyer now finds that owning a home is too expensive, based on our estimates of how long it takes to save money for a down payment and how high monthly payments as a share of income have climbed,” she wrote in a commentary.

“By fourth-quarter 2022, it will take 11.3 years for a first-time homebuyer with median income to save for a 10% down payment.”

And “it will take this homeowner 22.6 years to save for a 20% down payment,” Bovino said. “Both are over twice their prepandemic rates of five and 10.6 years, respectively.”

Affordability Issue

As for affordability, “mortgage payments as a share of income, assuming a 10% down payment, likely topped 25% in second-quarter 2022 for the typical first-time buyer,” she said.

And that figure is “set to worsen to 28% by fourth-quarter 2022 — its highest since first-quarter 2007 [before] the financial crisis — on soaring home prices and mortgage rates,” Bovino said.

The National Association of Realtors defines “affordable” as mortgages that don’t exceed 25% of income.

Looking at the impact on different wealth levels, Bovino says lower-income households in the bottom 40% already have been pushed out of the housing market.

“By first-quarter 2022, a middle-income first-time homebuyer was not able to afford monthly mortgage payments, with 60% of households no longer able to afford a home through fourth-quarter 2025.”

Mortgage Applications, Home Sales Slide

No wonder, then, that mortgage applications dropped 6.3% in the week ended July 15 from a week earlier, to the lowest level since 2000, according to the Mortgage Bankers Association.

“The weakening economic outlook, high inflation, and persistent affordability challenges are impacting buyer demand,” Joel Kan, an MBA economist, said in commentary accompanying the report.

“The decline in recent purchase applications aligns with slower homebuilding activity due to reduced buyer traffic and ongoing building-material shortages and higher costs.”

Meanwhile, existing-home sales in June fell to a two-year low of 5.12 million, according to the National Association of Realtors. That was the fifth straight monthly decline. Sales slid 5.4% from May and were down 14.2% from a year earlier.

It’s the same old story here. “Falling housing affordability continues to take a toll on potential home buyers,” NAR Chief Economist Lawrence Yun said in a commentary accompanying the report. “Both mortgage rates and home prices have risen too sharply in a short span of time.”

As for mortgage rates, the 30-year-fixed rate mortgage averaged 5.51% as of July 14, up from 2.88% a year ago, according to Freddie Mac.

And regarding prices, the median existing-home sales price hit $416,000 in June, jumping 13.4% from a year earlier, according to NAR.

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