Those of us anticipating a deceleration in the growth rate of U.S. home prices will have to wait at least a month longer. Although one can safely predict that price gains will begin to decelerate, the timing of the deceleration is a more difficult call.
Buyers remorse is also rearing its head. I overthink most purchases. Often, that means I leave the nike skirt in my shopping cart for so long that they run out of my size. Occasionally, telling myself I am a grownup with a good job is convincing enough that I press purchase. This feels great — until I start second guessing how much I spent.
According to a new survey by Money and Morning Consult, 36% of people who bought houses since the start of the pandemic think they overpaid. It’s easy to see why. The recent housing market has been defined by inadequate supply and unprecedented demand. Fierce competition followed, making retailers’ “did you forget something” emails seem subtle and leading to higher and higher home prices.
However, just because new homeowners have regrets now doesn’t mean they will in the future. Longer-term owners were much less likely to say they paid too much. Once your bank account recovers and your spare room is filled with extra “stuff” preventing the grandparents from staying over we usually feel good about the place we get to call home.
Let’s take a look at where interest rates and incomes have been historically and their impact on affordability. The chart below highlights how interest rates have been a lot higher and limit the price of a home that a buyer can afford. In 1980, the average mortgage rate was 13.75%, the median income was $22,000, and the median detached sales price was $108,000. That meant that the monthly housing payment was 55% of a homeowner’s income. Rates continued to drop, and incomes climbed decade after decade. In 2000,
mortgage rates were at 8%, the median income grew to $56,000, and the median detached sales price had blossomed to $317,000. Yet, the monthly payment was only 40% of a homeowner’s income. It swelled to 59% in 2007, just prior to the start of the Great Recession, and dropped to 33% in 2012 as housing began to climb once again. In 2020 and 2021, even as the median price of a home had rocketed to record levels, the monthly payment was at 37% and 44% due to historically low mortgage rates. Affordability was not an issue as mortgage rates had dropped to record lows. Flash forward to today’s 5.25% mortgage rate, $106,000 median household income, and a record setting April median detached sales price of $1,325,000, the monthly housing payment is 66% of a homeowner’s monthly paycheck. That is way too high for the average home buyer.
Skyrocketing home values were not a problem in 2020 and 2021 when rates reached 17-record lows. But, as rates have climbed from 3.25% to 5.25% in just a few months, home affordability has rapidly eroded like a sandcastle at high tide. Many potential home buyers no longer qualify to purchase a home, or their purchasing power has greatly diminished. A payment on a $1 million home with 10% down at the start of the year was $3,917 at 3.25%. Today, it is $4,970 at 5.25%, a $1,053 per month rise in the first five months of the year. Additionally, a buyer looking to spend $4,000 per month was touring homes at a $1,021,111 at the start of January. Today, that same buyer is now considering homes at $782,222. Their purchasing power plunged by nearly $240,000.
Even with home values reaching record highs, the housing market is rapidly cooling. There are fewer showings, fewer multiple offers, and homes are taking longer to sell. Overpriced homes are sitting, the inventory is rapidly growing, and price reductions are on the rise. In Orange County 22% of all available homes to purchase have reduced their asking price at least once. Demand, the number of pending sales over the prior month, is down by 31% compared to one year ago. It is down 22% compared to the 3-year average prior to COVID (2017 to 2019). In fact, demand is at its lowest point for this time of year since 2007, intentionally omitting the pandemic lockdowns of 2020.
The Bottom Line: The quick rise in mortgage rates has substantially eroded home affordability and the Orange County housing market is rapidly cooling. It all boils down to the monthly payment. When the monthly payment climbs out of reach for many home buyers, demand cools. The housing frenzy is quickly coming to an end. Sellers need to be careful in navigating the new housing landscape. Carefully pricing is fundamental in order to find success.
Steven Thomas: Report On Housing