Mortgage Payments Haven’t Been This Unaffordable Since 2008

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Record increases in home prices are eroding the savings typically offered by low interest rates.

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Supercharged home prices in markets across the country are canceling out the effects of moderately high incomes and historically low interest rates, two factors that generally make a home more affordable. Prices rose at a record pace for the fourth straight month in July due to a lack of homes for sale. Higher prices require buyers to take out larger loans, essentially signing them up for years to make large mortgage payments each month.

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Atlanta Fed, CoreLogic Inc. Calculates affordability using a three-month average of average household prices from the U.S. and median household income based on census data. In July, the latest month in the Atlanta Fed’s calculations, median home prices stood at $342,350, up 23% from a year earlier. Median income was $67,031, up 3%.

Economists said the biggest impact of declining affordability would be on buyers buying their first homes, who would have to sign up for larger monthly payments, buy a less desirable home or withdraw from the market altogether.

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“It’s very difficult for people to get their foot in the door of the housing market,” said Ralph McLaughlin, chief economist at home-finance startup Haus. “The question is whether this is an insurmountable obstacle or is it just that these families have to spend more of their monthly income on mortgages.”

The dynamics were different in 2008, even though the impact—the dislocation in the housing market—was the same. Home prices were falling, and many Americans owed more on their homes than they did on their homes. What’s more, widespread job losses have weighed on household incomes for years.

Christopher Ferreris and his wife, Danielle Ferreris, have been hoping to buy a home in the Tampa, Fla., area for nearly two years. They can afford about $1,600 in monthly payments, but every home they visit requires about 25% more than the monthly payment.

“It is almost as if we have gotten into a holding pattern because of how difficult it is,” Mr. Ferreris said.

According to Zillow, the typical value of a home in Tampa was $331,000 in August, up from $265,000 at the same time last year.

Ferrerises are doing everything they can think of to save money, and Mr. Ferreris started a side business of buying and selling sports cards last year. Now he counts on it about $500 a month.

According to the Atlanta Fed, during the early months of the pandemic, homes had become more affordable. Interest rates fell. And home prices, while still rising, were not rising as fast.

But then many families, after sitting on the sidelines for a few months, rushed to buy homes, eager for more space or to move out of crowded cities. Fierce competition drove up home prices. The power began to decline.

The Atlanta Fed estimates that by early 2021, Americans will need about 29% of their income to cover a mortgage. By July, it had increased to around 32 per cent. Mortgage payments at the Atlanta Fed include principal, interest, taxes, insurance, and related costs.

“At this point any affordability to lend to mortgage rates has largely been wiped out,” said Daryl Fairweather, chief economist at real estate brokerage Redfin.

Home buyers have noticed. According to Fannie Mae, about 63% of consumers surveyed in August believed it was a bad time to buy a home. This was up from 35% in the same period last year.

Orla McCaffrey at [email protected]

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