Why is the housing market so expensive?

Are you feeling the pinch of soaring home prices in today’s market? You’re not alone. Recent data from the National Association of Realtors (NAR) reveals that July 2023 witnessed the highest median home price on record at $406,700. Affordability is becoming a growing concern for many aspiring homeowners.

So, why are homes so expensive? A combination of factors, including interest rates, low inventory, and inflation, has contributed to the surge in sale prices. Let’s delve deeper into the market conditions and external influences affecting home prices, along with some savvy tips on how to become a homeowner without breaking the bank.

Historical Home Values: A Remarkable Ascent

Recent years have witnessed an unprecedented rise in home prices. In June 2022, NAR reported a record high median sale price of $413,800, and this year’s June was not far behind, at around $410,000. This surge has left many prospective buyers, particularly first-timers, feeling the affordability crunch.

“In 2012 and 2013, homebuyers spent about half of what they are spending today — approximately 33 percent of their income — to become homeowners,” says Clare Trapasso, Executive News Editor for Realtor.com. The contrast with March 2020, when the median home price was only $280,700, is stark.

Supply and Demand: Tilted Scales

A balanced real estate market typically maintains 5 to 6 months of housing supply. However, as of July, the country only has about 3.3 months’ worth. This is an improvement from January’s record low of 1.6 months but still falls significantly below the equilibrium point. The demand far outpaces the available supply, creating intense competition among buyers.

Sean Roberts, CEO of Villa Homes, emphasizes that housing has been critically under-built, particularly in the entry-level segment. This shortage has led to fierce competition and driven prices to all-time highs, leaving affordability at a multi-decade low.

Mortgage Interest Rates: A Game-Changer

Mortgage interest rates have climbed rapidly and significantly, making homeownership more challenging. As of August 2023, the average rate for a 30-year mortgage stands at 7.36 percent — the highest in over two decades. Just a year prior, it was 5.78 percent. This surge in rates has a profound impact on monthly house payments, which have increased by a staggering 96 percent since June 2019.

Consider this scenario: A $400,000 home with a 3.5 percent interest rate results in a monthly payment of $1,436. The same house with a 7 percent interest rate would entail a monthly payment of $2,128 — a significant $692 difference, or an extra $8,304 annually.

Wage Growth vs. Home-Value Growth: An Uneven Race

The disparity between average wage growth and home-value growth is widening, making homeownership less attainable. While average weekly earnings have seen an increase, they still struggle to keep pace with the rapid rise in home prices.

Tips for Affordability in a Competitive Market

While the current market poses challenges, homeownership is not out of reach. Here are some expert tips to help you become a homeowner without stretching your budget to its limits:

1. Compromise on Size: Consider smaller homes like condos, townhouses, or single-family homes with less square footage.
2. Broaden Your Search Range: Look for more affordable areas or places with lower property taxes, which can offer better value for your money.
3. Consider a Fixer-Upper: Older homes in need of upgrades often come at a lower price. If you’re handy, this could be an excellent opportunity to save.
4. Shop Around for Loans: Compare rates and terms from different lenders to find the best deal. Explore options like FHA, VA, and USDA loans, which may require lower down payments.
5. Explore Buyer Assistance Programs: Check out down payment assistance programs designed to make homeownership more accessible, especially for first-time buyers.
6. Consider Purchasing with a Partner: Co-borrowers or roommates can help share the financial burden and build equity together.

Conclusion: Navigating the Path to Homeownership

While the current housing market presents its challenges, with careful planning and strategic decisions, owning a home is still within reach. By being informed and exploring all available options, you can find a place to call your own without breaking the bank. Happy house hunting!