At 8.6%, inflation has become a large bear. Not just as a big, hairy, snarling cause of bear markets, but the question of how everyone, including consumers, will bear up under, as rising prices have also lifted mortgage rates.
The latest report, through July 7, shows current average rates on a 30-year mortgage at 5.30%, according to a St. Louis Federal Reserve analysis of data from Freddie Mac. The National Association of Realtors says that mortgage payments have “spiked 51% from May 2021.”
“Compared to one year ago, the monthly mortgage payment rose to $1,842 from $1,220, an increase of 51%,” the organization wrote. “The annual mortgage payment as a percentage of income inclined to 24.4% this May from 16.9% a year ago. Largely due to higher home prices compared to modest gains in median family incomes and higher mortgage rates.”
Home prices had already seen the highest growth in at least 45 years by the CoreLogic Home Price Index for March, breaking 20%.
“Regionally, the West has the highest mortgage payment to income share at 35.8% of income,” NAR noted. “The South had the second highest share at 24.7% followed by the Northeast with their share at 21.3%. The Midwest had the lowest mortgage payment as a percentage of income at 17.8%. Mortgage payments are not burdensome if they are no more than 25% of income.”
At current prices and rates, NAR says that a home purchase was largely unaffordable for first-time buyers, as they’d be spending 25.6% of their income on housing. “Housing affordability had double-digit declines from a year ago in all four regions. The South had the biggest decline of 33.8%. The West experienced a weakening in price growth of 30% followed by the Midwest at 27.6%. The Northeast had the smallest dip of 25%.”
Additionally, between May 2021 and 2022, workers saw a 3.9% decrease in real average weekly earnings, so had even less money to put toward housing, so even calculating a flat percentage of income when consumers’ earnings aren’t going as far as they used to might be optimistic.
All the NAR calculations also assume 20% down and a 25% qualifying ratio of principal and interest payment to income. Many would-be first-time buyers don’t have the money for that level of down payment, meaning that interest rates would be on the higher side.
Will things get better/? Maybe. Eventually. But consumers are saving less and increasing their credit card debt as they dog paddle in the economic tides. Plus, estimates suggest that while home price growth will slow, it won’t be negative, which is what most people looking to buy actually need.