Soaring mortgage rates, escalating home prices and a limited housing supply have created a perfect storm for prospective homebuyers over the past two years.
The challenging market has pushed homeownership out of reach for many, particularly first-time buyers. A Bankrate analysis reveals that to afford the median home price of $402,343, individuals now require an annual income of $110,871. That's a nearly 50% increase in four years.
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"Affordability is the biggest issue – finding a home that's in your budget," Bankrate housing market analyst Jeff Ostrowski said. "The higher the price of a home, the harder it is to come up with the down payment or to qualify for the monthly payment. Home values are near record highs, and if you want a house, you have little choice but to pay a high price."
The rising cost of housing has dramatically altered the homeownership outlook. Today, potential homeowners in 22 states and Washington, D.C., need a six-figure income to afford a typical home. This includes Western states that experienced rapid growth during the pandemic, such as Utah, Montana, and Idaho. Just four years ago, that was true of only seven jurisdictions: Washington, D.C., California, Hawaii, Massachusetts, New York, New Jersey, and Washington.
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Homeownership costs have skyrocketed nationwide because of a sharp increase in mortgage rates. Over the past few years, interest rates have jumped by more than three percentage points. The dramatic rise has made it significantly more expensive to afford a median-priced home. For instance, the average 30-year fixed mortgage rate surged from 3.68% in January 2020 to 7.07% by March 2023.
A few years ago, if you put 20% down on a $250,000 home and locked in a 3.68% rate, your monthly payment would have been about $1,400. That same house with a 20% down payment and a 7.07% interest rate would have a monthly payment of about $1,800.
American families face a daunting housing market characterized by sky-high prices, elevated mortgage rates, and a severe shortage of homes for sale. Many homeowners who locked in low mortgage rates during the pandemic stay put, limiting the housing supply available to new buyers.
"Over the past few years, the supply of homes has been constrained by a number of factors, including muted homebuilding and the lock-in effect," Ostrowski said. "But demand for homes has been growing, and there are more buyers than sellers."
According to the National Association of Realtors (NAR), home prices reached an all-time high in May and don't show any signs of dropping. The median price of $419,300 in May 2024 eclipsed the record high of $413,800 set in June 2022.
"Prices will remain firm and will not decline on a national level," NAR chief economist Lawrence Yun said.
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