Now is not the time to buy a house. Building one may be a different story.
High prices and interest rates lead to an unwelcome combination. As of February, the National Association of Realtors’ index of housing affordability — based on existing home prices, 30-year fixed mortgage rates and median household income — was 21% lower than a year earlier, indicating the lowest housing market. Affordable since August 2008.
Since February, home values have been up, with the median current home price up 15% from a year ago in March, while the 30-year mortgage rate rose from an average of 3.8% in February to 5.11% in the week ending April 21. . Affordability, as NAR calculates, is likely now approaching levels it fell in 2006, when the housing bubble was in full swing.
This dynamic doesn’t quite instill confidence in the usually busy spring selling season. In fact, the Commerce Department reported on Tuesday that new home sales fell last month by a seasonally adjusted 8.6% from February, putting them 12.6% below their level a year ago. The National Association of Realtors said Wednesday, its index of pending sales of existing homes fell 1.2% in March from February, down 8.2% from a year earlier.
Declining affordability is clear to Americans. Households surveyed by the University of Michigan judged home buying conditions in March to be their worst since September 1982, when the average mortgage rate was 15.4%, the unemployment rate was 10.1% and the US economy was in its deepest decline since. The Great Depression.
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What is remarkable is how tight the market is despite the unfavorable affordability. This is partly due to the big bump of millennials reaching home buying age, an increase in the desire for homes caused by the pandemic, and declining levels of new home construction in the years following the housing crash.
Moreover, the rapid rise in rents — up 16.8% in March compared to the previous year, according to Zillow — is still in many cases buying a home a better deal for those who can afford it. Higher rents are also attracting investors, whose home purchases are further constraining supply.
It’s hard to imagine home prices continuing to rise for a long time if prices continue to rise, but supply constraints may make direct price drops unlikely as well. For now, that puts homebuilders in the catbird seat.
On a quarterly earnings call earlier this week, builder DR Horton said demand remains very strong despite rising prices, and that he continues to delay home sales until later in the construction cycle. Similarly, Tri Pointe Homes said in its earnings statement that it has not seen any decline in demand.
It will take a lot of construction to rebalance the supply of homes with the demand. Buying a home will still be expensive for some time now.
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It appeared in the April 28, 2022, print edition as Still Home Sellers Market.