Quiver Quantitative - The recent surge in U.S. mortgage rates has led to the most unaffordable housing market since 1984. Affordability dropped following the escalation in borrowing costs, with no immediate reprieve in sight. While last year experienced a brief pause from price hikes due to the pandemic, house values have rebounded, regaining approximately $3 trillion. One significant factor is the Federal Reserve's decision to increase its benchmark rate due to "significant upside risks to inflation." As a result, the average rate on a 30-year fixed mortgage reached 7.16%, with some buyers, particularly those with unfavorable credit scores, facing even higher rates around 8%.
Despite the escalating rates, some borrowers remain optimistic, believing that purchasing now could yield lower prices. They hope to refinance their mortgages when rates hopefully drop in the forthcoming years. However, house hunters face a stiff challenge with the current limited housing inventory. Many homeowners, benefiting from their current lower mortgage rates, are hesitant to list their properties, further exacerbating the affordability crisis. This supply shortage, combined with rising prices, contributes to the existing affordability dilemma.
Another challenge in the housing market is the sharp decrease in transactions for existing homes, which plunged by nearly 19% in June year-over-year. Analysts like Mark Hamrick of Bankrate point out the inventory crisis as a burgeoning structural issue in the housing industry. The lack of available properties not only affects potential homeowners but also puts a damper on the overall sales for previously owned homes.
However, there is a glimmer of hope in this gloomy scenario. Andy Walden from Black Knight (BKI) anticipates that the soaring rates will deter potential buyers, leading to reduced transactions and subsequently driving down property prices. Still, the current sentiment, as echoed by Mark Zandi from Moody's (MCO), is that of concern, especially with rates exceeding 7%. Zandi remarks that once affordability becomes too distant, the market becomes dormant, and house prices could start plummeting.
This article was originally published on Quiver Quantitative