While housing affordability remains a challenge for many buyers in the U.S., conditions are somewhat improving due to lower mortgage rates.
Buyers need to earn $115,000 to afford the typical home in the U.S., according to a new report by Redfin, an online real estate brokerage firm. That’s down 1% from a year ago, and represents the first decline since 2020.
Housing payments posted the biggest decline in four years, Redfin also found. The median mortgage payment was $2,534 during the four weeks ending Sept. 15, down 2.7% from a year ago.
Both declines stem from lower mortgage rates, said Daryl Fairweather, chief economist at Redfin.
As of Sept. 19, the average 30-year fixed rate mortgage is 6.09%, down from 6.20% a week prior, according to Freddie Mac data via the Fed. Rates peaked this year at 7.22% on May 2.
“The only reason mortgage payments are down is because of the rate effect,” Fairweather said.
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Challenges remain: The typical household earns 27% less than what they need to afford a home, about $84,000 a year, per Redfin data. Home prices are still high, too. The median asking price for newly listed homes for sale is $398,475, up 5.4% from a year ago, Redfin found.
While housing overall continues to be unaffordable for most buyers, “this is as good as it gets,” said Orphe Divounguy, senior economist at Zillow, as the market is generally seeing lower mortgage rates, more inventory and low buyer competition.
Here’s what buyers can expect in the coming months.
‘Mortgage rates will go by the way of the economy’
Lower home loan rates provide “a great opportunity for buyers who have been waiting,” Divounguy said.
Just because the Federal Reserve cut interest rates, it doesn’t “necessarily guarantee mortgage rates will continue to fall,” he said.
While mortgage rates are partly influenced by the Fed’s policy, they are also tied to Treasury yields and other economic data.
“Mortgage rates will go by the way of the economy,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
“If the economy shows signs of weakening … rates will come down,” Cohn said. “If we see the opposite, and that the economy is chugging along and employment gets stronger, it’s quite possible that rates will go up.”
More homes are coming on the market
On top of lower mortgage rates, a higher inventory of homes for sale makes the housing market more favorable for buyers, said Divounguy.
There were 1,350,000 homes for sale by the end of August, up 0.7% from a month prior, according to the National Association of Realtors. That inventory level was up 22.7% compared to August 2023.
Meanwhile, homebuilder confidence in the market for newly built single family homes improved in September, according to the National Association of Home Builders. Its survey also shows that the share of builders cutting prices in September was 32%, down one point. It’s the first decline since April, according to NAHB.
“That tells me that some builders are probably starting to see some increase in foot traffic,” said Divounguy, and that the market could get competitive again.
Price growth will depend on the level of existing home inventory, said Robert Dietz, chief economist at the National Association of Home Builders.
“Existing home inventory is expected to rise as the mortgage rate lock-in effect diminishes, placing some downward pressure on prices as well,” Dietz said.
Wait and ‘you’re trading one difficulty for another’
The housing market is not going to get generally worse over the next 12 months, said Fairweather. If house hunters are discouraged because they haven’t found a home, they might have a better chance next year when there are more listings, Fairweather says.
But they risk higher competition, she warns.
“You’re trading one difficulty for another difficulty,” Fairweather said.
If mortgage rates further decline next year, the number of homes for sale might grow. Most homeowners are sitting on loans with record-low mortgage rates, creating a so-called “lock-in effect,” or “golden handcuff” effect, where they don’t want to sell and finance a new home at a higher rate.
“We’ll probably see more people who are buying, or selling to buy again,” said Fairweather, because high borrowing costs held them back.