The Last Time Housing Affordability Was This Bad Was In 1989

It was more expensive to buy a US home in June than it has been for any month in more than three decades, as record-high home prices collided with a surge in mortgage rates.

The National Association of Realtors’ housing-affordability index, which factors in family incomes, mortgage rates and the sales price for existing single-family homes, fell to 98.5 in June, the association said Friday. That marked the lowest level since June 1989, when the index stood at 98.3.

Existing-home sales have declined for five straight months. Worsening affordability has been a big factor, pricing more buyers out of the market. But even with fewer transactions, prices continue to rise strongly from a year ago because the number of homes for sale around the US remains below historical levels.

The drop in affordability makes it especially hard for first-time buyers to enter the market and access the main path for the US middle class to build wealth. First-time buyers typically need to save up for a down payment and can’t benefit from selling a previous home.

Conditions have eased a bit in recent weeks. Mortgage rates hit a 13-year high in June but have ticked lower since. Some sidelined buyers re-entered the market in July and August, according to real-estate agents.

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“Thankfully, the worst in affordability could already be over for this cycle,” said Lawrence Yun, NAR’s chief economist. “Mortgage rates have calmed down in recent weeks, and the consistent wage growth … is narrowing the gap with home-price growth.”

Existing-home prices have jumped 46% nationally in the past three years, according to NAR, fueled for much of that period by buyers seeking more space during the pandemic. Still, home buying remained relatively affordable in 2020 and 2021 because mortgage rates dropped to record lows, offsetting much of the price increases for buyers.

Mortgage rates have climbed since the start of the year, rising to 5.22% this week from 3.1% at the end of 2021, according to mortgage-finance company Freddie Mac. Higher borrowing costs are partly due to the Federal Reserve’s aggressive efforts to tame inflation by lifting interest rates.

Now, price declines are more likely in some of the markets that showed the strongest price growth during the pandemic, such as Boise, Idaho, Austin, Texas, and Phoenix, housing economists say.

On a national basis, economists expect home-price growth to slow significantly by 2023, and some are forecasting small year-over-year price declines. Yet years of depressed new-home construction following the 2007-09 recession has left the housing market undersupplied, which is likely to prevent steeper price drops, some economists say.

“We’re not going to go back to 2019 prices,” said Nicole Bachaud, an economist at Zillow Group Inc. “Even if prices start to fall a little bit, it’s not going to be in any meaningful way that impacts affordability.”

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Mortgage-interest rates today are lower and home prices and incomes are higher, compared with the last time affordability was this low. The median existing single-family sales price in June was $423,300, while the average mortgage rate stood at 5.6% and median family income was $91,952, according to NAR. In June 1989, the median existing single-family home price was $94,800, mortgage rates were 10.6% and the median family income was $34,128, NAR said.

Consumer sentiment toward the housing market has worsened alongside affordability. The percent of consumers surveyed by Fannie Mae in July who said it was a good time to buy a home fell to 17% in July from 28% a year earlier, while the percent who said it was a good time to sell a home fell to 67% from 75% a year earlier.

Phoebe Ullberg was among the new homeowners to experience sticker shock. She started shopping for her first home in Napa, Calif., in March, when she saw mortgage rates rising and worried about being priced out of the market. She lost out on two offers, and mortgage rates were so volatile that it was difficult to lock in a borrowing rate.

When she found a three-bedroom house with a backyard in June, “I went in making an offer, not even fully knowing what my monthly payment was going to be and just hoping that it would be OK,” she said. “It was very discouraging.”

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Ms. Ullberg bought the house for $775,000, and her 5.75% mortgage rate pushed her monthly payments higher than she had hoped, she said.

“Perhaps if I had waited a couple months, I might have been in different circumstances and the market might have been a little easier,” she said. But “it feels great, no matter what.”

The increase in mortgage rates this spring spooked buyers, including some that signed contracts to buy homes when rates were lower. Large home builders including D.R. Horton Inc. and PulteGroup Inc. reported in July that their cancellation rates rose in the quarter ending June 30 from a year earlier. Both companies said they have been able to resell those homes to other buyers.

The typical monthly mortgage payment rose to $1,944 in June, NAR said, up from $1,297 in January and $1,265 in June 2021, assuming a 30-year fixed-rate mortgage and a 20% down payment.

“People who used to say, ‘Boy, I want to move in and buy a home at $250,000 or $300,000’—we don’t have that kind of market anymore,” said Lysi Bishop, a real-estate agent in Boise. “Affordability has absolutely changed, and that means we’ll have less buyers.”