US mortgage rates jumped to the highest level in more than 20 years. Freddie Mac reported a rise in the average 30-year fixed loan rate to 7.09% from last week’s 6.96%. This marks the highest rate since April 2002, according to the statement released on Thursday.
As a result, US housing affordability declined, driven by escalating costs and constrained inventory.
Black Knight Inc. states rising borrowing expenses and inflated home prices due to limited inventory have worsened housing affordability. Declining existing home sales deter many potential buyers amid higher costs and economic concerns. The scarcity of listings, increased expenses, and economic uncertainties restrain the purchasing intentions of numerous prospective buyers.
The worst point of US housing affordability
The steep rise in mortgage rates has driven US housing affordability to its worst point in almost 40 years since 1984. Delaying for relief poses a risky bet for prospective homebuyers, emphasizing the urgency in the current market.
The recent reversal erases last year’s pause as home prices regain almost $3 trillion lost during the pandemic. A valuable lesson: the brief relief from pandemic-driven price gains is now replaced by resurgent home values. The S&P 500’s upward momentum from corporate profits has waned, showing their diminished impact this time.
The S&P 500 has experienced a 2.2% drop in five reporting cycles, contrasting the recent two-decade pattern. Unlike the past 20 years, where the gauge often rose when members reported, it’s now showing a divergence.
Data from July Minutes
Minutes from the July meeting indicated policymakers recognized notable inflation risks, implying potential future rate hikes and added mortgage rate pressure. Which again directly affects US housing affordability.
As key borrowing cost has risen to levels not seen since 2001, the Federal Reserve may raise rates more. This raises the potential for mortgage rates to approach 8 percent, driven by possible rate hikes.
Melissa Cohn, from William Raveis Mortgage, noted how the economy’s strength surprised many by withstanding higher rates. Higher mortgage rates, resulting from the Federal Reserve’s rate increases, played a role in the decline in US housing affordability.
Data from the Mortgage Bankers Association revealed a 7.16 percent average contract rate for 30-year fixed mortgages. Buyers with lower credit scores and higher debt-to-income ratios are receiving 8 percent rate quotes.
The economy’s resilience defined earlier predictions of rate cuts and surprised observers. The Federal Reserve’s benchmark rate hikes contributed to the increase in mortgage rates. Melissa Cohn mentioned that predictions earlier in the year anticipated rate cuts by now. Despite rising rates, the economy and consumers have demonstrated unexpected resilience.
More of a Metropolitan issue than a National one
Alex Armlovich, a senior housing policy analyst from the Niskanen Center, a Washington, D.C.–based think tank.
In the midst of a dynamic housing landscape, Armlovich considers the US housing affordability crisis more of a metropolitan issue than a national one.
Fortune magazine sought insights from Armlovich, who explains that while it used to be possible to buy affordable land far from essential services, this dynamic is shifting due to factors like remote and hybrid work. Middle markets that were once havens from unaffordability are now evolving in this new era.
Alex Armlovich illuminated the job market’s pivotal role in the ongoing US housing affordability crisis. Renowned for his housing insights, Armlovich emphasized job availability’s significant influence on individuals’ housing affordability challenges.
Armlovich employed a simple “two by two” model to reinforce his stance, observing that locales with limited job prospects typically provide more economical and abundant housing choices. Conversely, regions boasting both high-wage jobs and attractive climates often entail heightened housing expenses.
He contended that while poverty remains a longstanding hurdle to affordable housing, even individuals with substantial earnings may encounter difficulties acquiring homes near sought-after job opportunities.
In the meantime, Jobless claims decrease
The number of jobless claims dropped significantly in five weeks, indicating employers’ hesitancy to cut staff due to a robust economy. A decline in unemployment benefit applications suggests employers are cautious about downsizing as the economy remains strong.
Labor Department data for the week ended on Aug 12 showed a drop of 11,000, aligning with economists’ median forecast. Initial claims reached 239,000, in line with predictions from a Bloomberg survey of economists, as reported on Thursday.