Housing Affordability Dips Below 2006 Bubble Peak Levels

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In a striking echo of the past, the average 30-year fixed mortgage rate on Monday soared to 7.48%, a high not seen since 2000. This rise exacerbates the already precarious state of housing affordability, which, as tracked by the Atlanta Fed, had plunged below the levels witnessed at the peak of the 2006 housing bubble. With the recent mortgage rate surge accounted for, August 2023 is set to be the grimmest month for housing affordability this century.

The current situation originated from last year’s sharp rise in mortgage rates, which spiraled from 3% to over 7%. This surge, in tandem with the Pandemic Housing Boom that drove U.S. home prices up by over 40% in just over two years, has eroded housing affordability nationwide. As Lisa Sturtevant, chief economist at Bright MLS, notes, the housing market is at a crucial juncture, with the elevated mortgage rates prompting some prospective buyers to retreat from the market, and potentially leading to a slowdown in the housing market this fall.

Mortgage Rates Hit 7.48%, Highest Level Since 2000

On Monday, the average 30-year fixed mortgage rate reached an alarming 7.48% – the highest level in over two decades. This surge in mortgage rates has led to a severe decline in housing affordability, pushing August 2023 to be the worst month for housing affordability this century.

Mortgage Rates Surge and Housing Affordability Deteriorates

This predicament is a result of last year’s sharp rise in mortgage rates, which escalated from 3% to over 7%. Alongside this, the Pandemic Housing Boom has pushed U.S. home prices up by over 40% in just over two years, exacerbating the nationwide housing affordability crisis. Lisa Sturtevant, chief economist at Bright MLS, warns of a very slow fall in the housing market this year due to high mortgage rates. In her statement to Fortune, she says, "It is likely to be a very slow fall [in the] housing market this year."

Risks in Overheated Housing Markets

According to Sturtevant, the greatest risk lies in overheated housing markets where affordability challenges are the worst, including some West Coast markets and other regions where prices have quickly escalated. However, she does not foresee major house price corrections, given the historically low supply levels and overall healthy economic conditions.

Comparisons to the 2008 Housing Crash

Although the current lack of housing affordability echoes the conditions leading up to the 2008 housing crash, there are distinct differences between the two periods. Unlike the 2008 crash, the U.S. is not grappling with an excessive surplus of existing homes for sale. In fact, housing inventory levels are at historic lows, with a staggering 47% decline in homes available for sale in July 2023 compared to July 2019.

Path to Improving Housing Affordability

Improving housing affordability largely depends on three key factors: rising incomes, declining home prices, and lower mortgage rates. Among these, mortgage rates have the potential for the most significant short-term impact. Mortgage rates are inherently volatile and can rapidly shift downwards if financial markets loosen. This is opposed to home prices, which historically resist steep declines.

Skepticism Surrounds Mortgage Rate Forecasts

The Mortgage Bankers Association predicts that the average 30-year fixed mortgage rate will decline to 6.2% by Q4 2023 and further down to 5% by Q4 2024. However, renowned housing analyst Bill McBride voices doubt, stating, "in my humble opinion, rates will be higher for longer than they expect."

Despite the bleak outlook, it’s crucial to remember that the housing market is dynamic and subject to changes influenced by various factors, including the state of the economy, government policies, and global events. Therefore, while the current situation may seem dire, there is still potential for improvement.

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