We bought a house four years ago for $770,000 with a 2.625% thirty-year mortgage. Home insurance cost $4,000. Our 25% down-payment was $192,500.
Fast-forward to now.
Prices have jumped. That house costs $1,050,000, increasing the down-payment by $70,000 (36%). Mortgage rates are 7%, so our monthly payment goes from $2,334 to $5,239 – $34,860 more per year. Home insurance is $9,200.
All in, the same house would require $70,000 more up-front and $40,000 extra per year (123%).
The market has changed, and that must be a problem for residential real estate.
I wouldn’t buy that house today.
Higher prices, much higher mortgage rates, and more expensive insurance have stretched home affordability. According to this bulletin by the Federal Reserve Bank of Kansas City, “In 2018, the share of income needed to purchase a new home in the median country was roughly 20 percent, and the median-priced home was considered unaffordable in only 12 percent of counties. By 2024, the share of income needed to purchase a new home rose to 28 percent in the median county, and the median-priced home was considered unaffordable in 37 percent of U.S. counties.”
You’d expect prices to soften in this environment. In some places they have, but not everywhere. Inventory levels explain the difference.
ResiClub does a great job analyzing the real estate market. Last month, they wrote that “local housing markets where active inventory has returned to pre-pandemic levels have experienced softer home price growth (or outright price declines) over the past 3 years. Conversely, local housing markets where active inventory remains far below pre-pandemic levels have, generally speaking, experienced stronger home price growth over the past three years.”
For those curious, inventory in the northeast and midwest is still tight, but levels are increasing in the Sun Belt (especially Florida) and Mountain West.
Tight inventory helps prices for a while, but at some point affordability challenges should matter. The Wall Street Journal reported on an uptick in sellers pulling their houses off the market ostensibly because they weren’t getting the prices they wanted, which could mean more spring inventory that might move at lower prices. Wells Fargo agrees. “[T]he elevated stance of financing costs threatens to discourage home buying in the months ahead. Elevated new home inventory levels and improved availability in the existing market stand as additional headwinds.”
What Does This Mean for You?
Buyers
Stay informed. Real estate prices don’t increase in a steady line year-after-year. Work with an experienced realtor to understand inventory levels, trends, and comps in your area. Check out ResiClub or other resources.
Be patient, see if the market is turning in your area, and structure offers accordingly.
Don’t buy a home if you’re only planning to own it for a few years.
Sellers
Don’t anchor to peak Covid pricing when determining your list price.
Prep your house to stand out. Sellers haven’t had to do this for years when all-cash, no inspection offers were flying around.
Ignore the goofy new rules that say you don’t have to pay a buyer’s agent. That lawsuit was based on seller’s market greed, and you’ll be at a disadvantage when the market turns.
