Falling prices may be luring buyers back into the U.S. housing market, but don’t let that fool you — homes are still far from affordable.
Prices in many U.S. housing markets have been declining over the past year and buyers are starting to make purchases again. But is now the right time to buy?
A careful look at the cost of mortgages over the past couple years suggests that prices aren’t nearly as low as they could be, and that over the life of a mortgage, buyers are actually paying far more for their homes than they would have in 2021 when housing prices peaked.
Two solutions are needed to address this affordability crisis: buyers need to fully leverage their negotiating power, and cities need to encourage new housing.
As an example, consider John, who found his dream home: a two-bedroom, two bath townhouse, close to his job, with enough space for his family, and good access to everything they need. John was hesitant to buy — prices were high and still rising — but on Nov. 10th, 2021, he closed the deal. He bought the home for $400,000 on a 30-year fixed rate mortgage with a 20% down payment and a 2.98% interest rate. It was perfect: only $1,346 a month to service the mortgage.
But what if John had waited a year? National average interest rates on that type of mortgage were 7.08% in November 2022. If he had closed on the same home for the same price a year later, with 20% down, and a 30-year fixed rate mortgage, his mortgage payment would have been $2,146 per month — almost 60% higher. John might not have been able to afford his dream home if he had waited for prices to fall, and would have had to settle for something smaller and less convenient.
Now consider the example of John’s friend Carla, who waited to buy. Price spikes forced her to put homeownership on hold. But lately, Carla is seeing price cuts and hearing stories about how the market is starting to recover. Now seems like the time to buy.
Carla finds a home valued at $400,000. She has good credit and enough money saved for a 20% down payment, but the monthly payment is the big concern. Assuming she could get an interest rate close to the national average of 6% — twice as high as what John’s mortgage was in 2021 — she would have to negotiate the price down by $95,000 if she wanted to have the same monthly mortgage payment as her friend.
That’s a cut of almost 25% of the total price of the home. No major U.S. city has seen prices fall far enough to make a home in early 2023 as affordable for homebuyers as it was in late 2021. Even in areas where prices are still being cut, buyers need to be careful not to buy too quickly.
Prices can and should be brought down further. Buyers need to leverage their negotiating power to pull them down as far as possible.
Of course, negotiating prices can only do so much. The Federal Reserve has been attempting to drive down prices by pushing up interest rates, but the effort so far hasn’t been effective. Lower prices lure buyers; things won’t be more affordable in the long term without broader fixes to the market.
For many of the regional U.S. housing markets, the ultimate problem is limited supply. Housing advocate Up For Growth estimates that the current housing supply deficit in the U.S. is more than 3.5 million units, with other estimates suggesting it could be as high as 20 million.
Buyers can leverage their negotiating power to bring down prices, and the Fed eventually will start to cut interest rates. In the meantime, the U.S. needs more housing. Municipalities need to do all they can to pave the way for developers: loosen density restrictions; shorten permitting times and untangle the red tape — especially for affordable housing.
Until that happens, affordable housing will remain out of reach for most Americans. Among buyers who can even afford to consider returning to the market now, buying a home, particularly in strained coastal housing markets, is an expensive project. Prices can go down further, and buyers should put pressure on both government and the market to see that they do.
Source: marketwatch