Springtime Housing Blues

Home Buyer Trends — May 2023

The Springtime house buying spree, which is common this time of year, is being stifled by inflation connected to home prices and mortgage rates. In this brief article, I will review several trends that are leading to “The Blues” and a far less than rosy picture for the current housing market in the United States. As you know, inflation and mortgage rates are the top 2 issues affecting home sales today. When they are both high, affordability is an extreme challenge for over 70% of prospective buyers. At the same time, this situation is giving most home sellers a big headache. Consumer confidence is very low with regard to the economy and also with fears of a big recession happening soon. In essence, most buyers are holding back this Spring and simply watching for a change that may happen in the Summertime wind. Monthly mortgage payments this year alone (not to mention the big spike last year) have risen about 3–4 percent. An interesting wrench thrown into the mix this Spring is that the low inventory levels continue to keep prices high, despite slower demand and lower nationwide sales volume. In a statistical sense, part of this data translates into a higher mortgage payment to income ratio. The obvious indication here is that there is a big decline in home affordability, buyer confidence, and desire to move forward with a home purchase this Spring.

Compared to about a year ago, the national average for the ‘home affordability ratio’ is up almost 15% (meaning 15 percent less affordable, harder to buy). Simply put, loan amounts (monthly payments) are rising because of the incessant interest rate hikes by the Federal Reserve over the past year and a half. For example, today’s 30-year fixed mortgage rate is hovering between 6.6%-7.2% (depending on the lender and other factors). Home affordability data-ratios, however, only tells one part of the overall story. On the flip side of the equation, they miss the large share of buyers who are not financing their home purchase. These are the cash buyers, and they consist of about 26% to 28% of all home sales. In some regions of the country where prices are depressed slightly (e.g., Mid-Atlantic), over 1/3rd of the buyers are paying with cash and forgoing the high interest rate mortgages. The overall consensus is “why finance and pay 7% interest, when we can deplete savings for a while and…