Homebuyers have faced the least affordable market since 2006 as mortgages skyrocket and real estate prices remain high.
Data from the Atlanta Federal Reserve shows that affordability has fallen below the peak of the housing bubble leading up to the 2008 financial crisis.
It comes after data from government-backed lender Freddie Mac showed that the average interest rate on a 30-year mortgage has now risen to a 20-year high, above 7 percent.
The Atlanta Fed uses home prices, mortgage rates and median incomes to calculate an “affordability” score each month. The latest figures, from June 2023, show that the score has dropped to 69.5 – almost 40 points lower than in June 2020.
And the report doesn’t even take into account mortgage rates, which rose again in August. It means this month is likely to be the worst housing affordability month of the century, according to estimates from Fortune.
Since 2006, homebuyers have faced the least affordable market, according to data from the Atlanta Federal Reserve
Buyers face a perfect storm of high mortgage rates that deter homeowners from moving. Many contracts had a term of thirty years while the interest rate was around 2 percent, effectively locking them into their current home.
A recent survey by Freddie Mac found that 82 percent of real estate buyers felt “trapped” in their property. And one in seven homeowners who have no plans to sell their home cited the current low rate as the main reason for staying put.
This trend means that stock is high and there are few homes on the market, keeping prices high.
According to the Fed, the median home price in June was $372,825. At the same time, mortgage rates fluctuated at 6.7 percent, meaning the average monthly payment was $2,168.
And the median household income was only $76,072.
By comparison, in April 2020, the average home was worth $271,167 and interest rates on a loan hovered at 3.3 percent — half of what they are today.
A homeowner therefore faced monthly payments of just $1,070.
Lisa Sturtevant, chief economist at Bright MLS, told Fortune: “Mortgage rates are now at their highest level in more than two decades, and for some home buyers, those higher interest rates are enough to cause them to pull out of the market.
According to data collected by Freddie Mac, rates have not risen to 8 percent since 2000
Homebuyers face the highest mortgage rates since 2002 as experts warn higher lending will bring the real estate market to an abrupt halt
“This year there will probably be a very slow decline in the housing market. Home prices, which had recovered over the summer, will fall in some markets as new listing activity picks up, while at the same time a portion of home buyers are exiting the market.”
Mortgages have been one of the hardest hit victims of the Federal Reserve’s relentless rate hikes.
The Fed has raised interest rates 10 times in the past 15 months in an effort to curb red-hot inflation.
The interest on a 30-year fixed-rate mortgage is not directly dependent on the Fed rate, but on the yield on 10-year government bonds.
Such returns are affected by inflation, Fed actions and investor reaction.
Usually, the difference between the 30-year mortgage rate and the yield on 10-year government bonds – also known as the ‘spread’ – fluctuates between 1.5 and 2 percentage points. For example, if the 10-year interest rate is 4 percent, the 30-year interest rate will be about 6 percent.
However, this ‘spread’ has widened radically to around 300 basis points.
Experts say these conditions are similar to those leading up to the financial crisis.
Cris deRitis, deputy chief economist at Moody’s Analytics, told MarketWatch: “Historically, the mortgage interest rate differential has only been around this level during periods of financial crisis, such as the Great Recession or the recession of the early 1980s.”
The number of new homes that came on the market in June was then 20 percent lower than in the same period last year.