With mortgage rates surging to 7.49% recently and home prices close to their all-time high, buying a house has never been a more foreboding prospect. Indeed, the housing affordability crisis has taken a turn for the worse. A rapidly shrinking proportion of Americans are financially equipped to deal with the highly imbalanced real estate market.
Just how bad have things gotten?
Well, according to recent data, housing affordability is at its worst level in nearly 40 years. While some historians may argue that today’s mortgage rates pale in comparison to the 15%-plus rates found in the 1980s, this doesn’t quite tell the full story. Home prices have far outpaced wages over the past several decades, to the point where buying a home is largely out of question for a growing percentage of prime working-age Americans.
Accounting for inflation, home prices are up nearly 120% since 1965, while median household income has increased by only 15%. It’s a staggering economic mismatch that permits only the wealthiest Americans the financial freedom to pursue real estate.
The U.S. home-price-to-median-household-income ratio stands at 7.75 as of May 2023. In layman’s terms, this means it takes nearly eight years of household income to purchase a home for the average family. The median household income is $70,784, according to the most recent U.S. Census Bureau Survey. This is the highest home-price-to-income ratio ever recorded. For context, in January 1985, the ratio was at 4.5.
Hopeful homebuyers have clearly noticed. Potential buyers are abandoning the housing hunt en masse in the face of perpetually elevated home prices and rapidly rising lending rates. As per a report released this week, demand for mortgages fell to the lowest level since 1996 over the past week.
Let’s take a closer look at some of the factors that have led to this 28-year low.
3 Reasons Why Buying a House Now Is a Terrible Idea
- Home prices. Prices remain the single-most important factors when it comes to buying a house. While there are some regions that have experienced some cooling in the post-pandemic real estate era, by and large, prices have never been higher. Literally. As of July, the median sale price across all home types was $421,714, per Redfin. Not only is this up 1.6% from last year (even despite historically weak housing demand) but also it’s a stone’s throw away from the highest level ever recorded — $432,397 in May 2022.
- Mortgage rates. Mortgage rates are another relevant factor for the majority of Americans considering buying a home. As has already been hinted at, they’re terrible. The 30-year has been fluctuating between 7% and 7.4% the past several weeks. That’s the highest level in decades. Perhaps even more devastating: rates may keep rising. With the Fed likely to hike rates at least one more time this year, don’t be surprised to see mortgages come along for the ride.
- Home supply. Home supply is a tricky factor when it comes to homebuying. Not only does the inventory of homes for sale affect other pertinent metrics, like home prices, they are also one of the byproducts of an unfriendly seller’s market. The fact is, many Americans are soaking up cheap equity under pandemic-era mortgage rates. As such, unless forced by unforeseen economic circumstances, many home owners are unlikely to put their home for sale, understanding they would likely have to lock in a higher-than-preferred rate in a new spot. This has only amplified the already present home shortage in the country. As such, even finding an appropriately spec’d home in a desirable location can be an exercise in futility. And if you can’t find the home you want, where you want it, why buy at all?
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
