Yesterday we asked a rhetorical question: how can (record high) home prices be rising so fast that housing is both unaffordable and booming at the same time? While a rational answer has yet to emerge, today the WSJ picks up on the former and writes that the record growth in home prices has made owning a home less affordable than at any point since the financial crisis.
Citing data from the Atlanta Fed, the Journal writes that the median American household would need just under a third, or 32.1% of its income, to cover mortgage payments on a median-priced home. Even though mortgage rates are at all time lows, that's the most since November 2008, when the same outlays would eat up 34.2% of income. One can only imagine what will happen when prices continue to rise or when mortgage rates spike.
The advent of the latest housing bubble means that supercharged home prices in markets across the country, which in August rose by a record 20% across the top 20 MSA, are canceling the impact of modestly higher incomes and historically low interest rates, two factors that typically make owning a home more affordable. Higher prices require buyers to take out larger loans, essentially signing them up to make larger mortgage payments each month for years.
The Atlanta Fed calculates affordability using a three-month average of median home prices from CoreLogic and median household incomes based on census data. In July, the latest month in the Atlanta Fed’s calculations, median home prices were $342,350, up 23% from the year before. Median incomes were $67,031, up a tiny 3%, less than the current rate of inflation.
Citing economists, the WSJ said that declining affordability will have the biggest impact on buyers shopping for their first homes, who will have to sign up for larger monthly payments, buy less desirable homes or step back from the market altogether. It's also why Democrats recently proposed a subsidized 20-year mortgage for first-gen homebuyers, a gimmick that will only lead to even more taxpayer-funded market imbalances and an even greater bubble.
“It’s a lot more difficult for people to get their foot in the door of the housing market,” said Ralph McLaughlin, chief economist at Haus, a home-finance startup. “The question is whether it is an insurmountable hurdle or is it just that these households have to spend more of their monthly income on the mortgage.”
The current situation is unique: in 2008 the dynamics were different, even if the effect — complete disarray in the housing market — was the same. Home prices were falling, and many Americans owed more on their homes than the homes were worth. Furthermore, widespread job losses weighed on household income for years.
Christopher Ferreris and his wife, Danielle Ferreris, have been hoping to purchase a home in the Tampa, Fla., area for close to two years. They can afford about $1,600 in monthly payments, but every house they have seen requires monthly payments about 25% bigger than that. As a result, they are stuck renting, where the double whammy of soaring rent prices is also hammering their disposable income.
“It’s almost like we’ve gotten into a holding pattern because of how difficult it is,” Mr. Ferreris said.
The typical value of a home in Tampa was $331,000 in August, up from $265,000 at the same time last year, according to Zillow.
The Ferreris are doing everything they can think of to save money, and Christopher started a side business last year buying and selling sports cards. He now counts on it for about $500 each month.
Of course, during the early months of the pandemic, homes became more affordable while interest rates fell. However, following trillions in fiscal and monetary stimulus, the dynamic reversed rapidly as many families, after sitting on the sidelines for a few months, raced to buy homes, eager for more space or to move out of crowded cities. The fierce competition sent home prices soaring. Affordability began to decline.
According to the Atlanta Fed, at the start of 2021, Americans needed about 29% of their income to cover a mortgage. That has since risen to about 32% by July. The Atlanta Fed includes principal, interest, taxes, insurance and related costs in mortgage payments.
“Any affordability that mortgage rates lended has pretty much been erased at this point,” said Daryl Fairweather, chief economist at real-estate brokerage Redfin.
Home buyers have noticed. About 63% of consumers surveyed in August believed it was a bad time to buy a house, according to Fannie Mae. That was up from 35% at the same time last year.
The punchline: while the Fed pretends none of this is happening, Goldman's shelter inflation tracker just surged to the highest level on record, rising 4.6% Y/Y, a print which suggests that PCE Shelter Index, which lags by about 6 months, is about to go through the roof.
How and whether the Fed responds to a surge in housing inflation it will no longer be able to ignore remains to be seen.