Housing affordability crushed as median home price exceeds $400K

Prospective homebuyers are facing historically difficult market conditions as steep home prices and costly mortgage payments combine to slam their budgets.

The median cost of a single-family existing home surged 14.2% year-over-year to $413,500 in the second quarter, according to the latest data from the National Association of Realtors. The median price topped $400,000 for the first time on record in the organization’s data tracking.

“Home prices have increased at a pace that far exceeds wage gains, especially for low- and middle-income workers,” said NAR Chief Economist Lawrence Yun.

The affordability of single-family homes “dramatically tumbled” during the three-month period as mortgage rates soared, according to the NAR. Mortgage rates have climbed steadily this year on the expectation of tightened monetary conditions as the Federal Reserve raises interest rates to combat inflation.

Data showed that first-time homebuyers spent a whopping 36.8% of their family income on monthly mortgage payments during the second quarter. That number was up from 28.7% just one quarter earlier.

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Mortgage rates have surged this year.
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“A mortgage is considered unaffordable if the monthly payment (principal and interest) amounts to over 25% of the family’s income,” the NAR said in a release.

In 53 markets across the US, families needed at least $100,000 in annual income to afford a 10% down payment on a home in the second quarter. That was down from 27 markets in the first quarter.

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Some economists are predicting a looming correction for home prices.
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Mortgage rates have shown volatility amid mounting fears that the Fed’s sharp interest rate hikes will prompt a US recession. The key long-term mortgage rate surged above 5% this week, according to Freddie Mac.

Many economists have warned the US housing market is due to a significant correction for prices in the coming months as steep mortgages sap demand among would-be buyers.

Last month, Ian Shepherdson, a chief economist at Pantheon Macroeconomics, said prices would plunge “substantially” on “cratering” demand – particularly in overheated markets.

Mortgage signing
Higher mortgage rates are contributing to an affordability problem.
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Shepherdson warned that homes are likely “about 15 to 20% overvalued” compared to incomes.

“The market is adjusting to a new reality, with much lower sales volumes and far more inventory. Prices, therefore, have to adjust to the downside, likely quite substantially,” Shepherdson said.

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