A homeowner’s refrain, oft-heard around the nation’s capital in recent years, has hardened into sobering fact: Most Americans couldn’t afford to buy their own home in today’s market.
Fifty-five percent of U.S. homeowners say they could not raise the funds to purchase their home at current prices and interest rates, according to findings from the 2022 Housing Affordability Survey by Cato Institute released this month.
Housing prices have risen more than 40 percent since the start of the COVID-19 pandemic. A year ago, soaring home values were a point of pride. Now, for potential buyers and sellers, they are a source of fear.
“I think that the psychology is different now, even compared with January of this year,” said Daryl Fairweather, chief economist at real estate brokerage Redfin.
Cato researchers found that 87 percent of Americans are concerned about rising home prices. Three-quarters believe average people would not be able to afford a home in their community. Many fear their own children and grandchildren will not be able to purchase a home.
The facts support their fears. A recent report by the National Association of Home Builders found that three-quarters of Arizona residents would not be able to purchase an average Arizona home at current prices. Other research suggests most renters are priced out of the home-buying market in their own cities.
Interest rates on a standard 30-year mortgage flew past 7 percent this year after starting 2022 around 3 percent, the largest single-year increase in at least 50 years.
The spread between 3 percent and 7 percent interest adds up to roughly $1,000 more in a monthly mortgage payment on the mid-priced American home.
Rates have retreated to around 6.5 percent. That’s close to historic averages for home mortgages. Yet, by comparison to the low-interest housing boom of the last few years, borrowing costs seem impossibly steep to many Americans.
Lawrence Yun, chief economist at the National Association of Realtors, predicts that interest rates will decline to 6 percent, if not lower, by the end of 2023. “I think the 5 1/2 to 6 1/2 rate will be the kind of settling-down point,” he said.
That’s good news for potential buyers and sellers. But higher prices and rates have already sent the housing market tumbling into recession. Economists expect the broader U.S. economy to follow, sometime next year.
Home sales are plummeting. The National Association of Realtors recently forecast a 15 percent drop in 2022 and a 7 percent dip in 2023.
Home prices remain elevated, but they, too, will probably fall. Redfin predicts prices will dip by 4 percent in 2023, to a median value of $368,000.
Those trends are of greater concern, of course, to people looking to buy or sell. Most current homeowners locked in historically low rates and need not worry about the current market, so long as they aren’t planning to sell or borrow against their equity.
“The money’s still there,” Fairweather said, “but it’s a lot harder to get now.”
From an economist’s perspective, the current housing crisis is largely a matter of supply and demand, and the solution lies in increased supply: not more McMansions, but smaller, denser, more affordable dwellings.
“The way to make the numbers work will be to start building things more affordable,” Yun said. “And the only way to do that is to build smaller.”
Current renters strongly favor more home building, while homeowners oppose new construction, according to the Cato survey. And Democrats mostly favor more construction, while Republicans mostly do not. Their aversion seems rooted in fears that new housing might dampen the value of their own homes and concerns about traffic congestion and strained infrastructure.
The single-family home remains a dream for most Americans. In the Cato survey, 89 percent of respondents said they would prefer to live in one. Almost no one, it seems, prefers townhouse or condominium living.
But townhouses and condos are exactly what the housing market needs, economists say, especially in areas where prices are high and space at a premium.
“The best way to increase supply is to build dense, affordable housing,” Fairweather said.
The one demographic group that seems to be perfectly content with townhouses, condos and apartment living is urbanites, especially those of the millennial generation. One recent survey showed that one millennial in four is prepared to be a “forever renter,” with no plans to purchase a home.
“Don’t discount downtown living,” Yun said. “I think it is the dream of the millennials. The millennials need walkability, seeing friends, or at least the TV show ‘Friends.’”