The housing affordability crunch is here — with mortgage rates continuing to rise (see the lowest rates you can qualify for here) at the same time that housing prices do. So – as part of our series where we ask prominent economists and real estate pros their take on the housing market now – we talked to Nadia Evangelou. She’s the senior economist and director of forecasting at the National Association of Realtors (NAR), and focuses on regional and local market trends, including the effects of changing demographic and migration patterns. She also specializes in research and analysis on local housing affordability conditions and solutions to increase housing inventory. Here are her thoughts on the housing market now.
The outlook is for mortgage rates to rise even further
Mortgage rates for 30-year fixed loans hit roughly 6% in June, up from a little over 3% a year ago, according to Bankrate data. The upward climb will continue, says Evangelou, just not at that same rapid pace: “I don’t expect to see the same sharp increases that the market experienced in March and April. It seems that mortgage rates have already priced in some of the effects of the upcoming Fed’s rate hikes,” says Evangelou.
Some buyers may want to consider an ARM
Given the current market, Evangelou says some buyers should consider taking an adjustable-rate mortgage instead of a fixed-rate mortgage. “If they plan to sell or refinance in the next 5 years, a 5/1-year ARM may make more sense because the rate on these is still below 4.5%. Thus, for a median-priced home, the monthly mortgage payment is about $300 lower than the payment for a 30-year mortgage,” says Evangelou. You can see the lowest mortgage rates you can qualify for here.
There are signs that the market is cooling
Both rising mortgage rates and home prices hurt affordability for many buyers. “As a result, existing home sales have dropped for the last four months. I expect a larger reduction of the home sales activity in the following months, especially after summer months,” says Evangelou.
And buyers are getting priced out of the market. Still, not all home buyers can afford to buy these additional homes. According to Evangelou, buyers earning $75,000 can afford about 25,000 fewer listings now compared to January.
Institutional buyers may increase competition for first-time buyers
With rising mortgage rates hurting affordability, more people are renting and due to low inventory, rents are rising sharply. “For institutional buyers, this translates to larger profits. However, a larger market presence of institutional buyers increases market competition for first-time home buyers. Research has shown that institutional investors may be taking a significant portion of homes that would otherwise be sold to first-time and lower-income buyers,” says Evanagelou.
Home prices will continue to rise but at a slower pace
“Due to a housing shortage, home prices won’t drop in 2022. Remember that when there is a housing shortage, home prices don’t fall, in fact, home prices rose about 15% in May, although mortgage rates were about two percentage points higher than a year earlier,” says Evangelou.
Inventory is rising
There are about 20,000 more homes available for sale for buyers earning $200,000. “While it’s promising to see more homes available in the market, more entry-level homes are needed,” says Evangelou.