Mortgage rates and home prices are both falling — yet buyers still need a salary of at least $142K a year to afford a $500K home
Mortgage rates continue to slide, and home prices just dropped by the biggest amount since 2011, but it’s not enough for wary Americans to jump back into the market.
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Freddie Mac chief economist Sam Khater says prospective buyers are keeping a close eye on rates as they wait for their moment. As for inventory, he adds, “a recent rebound in single-family housing starts is an encouraging development that will hopefully extend through the summer.”
Buyers braving today's rates will need a substantial income to afford a quality home.
Say you’re buying a $500,000 property. Assuming you have a 10% down payment and lock in a 30-year fixed mortgage at today’s average rate of 6.67%, you’d have to pay about $3,563 a month after property taxes and insurance, according to estimates from Zillow.
Considering that most lenders want you to keep your housing expenses at or under 30% of your gross income, you’d need to earn at least $142,500 a year to afford that $500,000 home.
30-year fixed-rate mortgages
The average 30-year fixed mortgage — the most popular home loan among American buyers — slipped from an average rate of 6.69% to 6.67% this week.
The rate still remains elevated from last year, however, when it averaged 5.81%.
While the Fed paused its series of hikes to the federal funds rate this month, officials said to expect another half-point increase by year’s end — higher than previously projected.
“In other words, borrowing, including home purchases, will likely remain expensive through the remainder of the year,” writes Realtor.com economist Jiayi Xu.
Xu adds that affordability remains a challenge for prospective buyers, meaning a significant share will be flocking toward cheaper markets — driving up prices in these areas as well.
“The heightened competition in these markets may worsen the conditions faced by buyers with financial constraints, particularly due to the already limited supply of affordable homes.”
15-year fixed-rate mortgages
The average rate on a 15-year home loan also dropped from 6.10% to 6.03% this week.
This time a year ago, the 15-year fixed-rate averaged 4.92%.
Meanwhile, the median price of an existing home also dropped in May — to $396,100, down 3.1% compared to the same month a year ago, reports the National Association of Realtors (NAR).
That’s the biggest year-over-year decline since December 2011.
Read more: Americans refuse to let higher prices derail their travel plans — 10 tactics to keep your summer vacation on budget
Buying may have faltered, but building picked up
Redfin deputy chief economist Taylor Marr says either a large drop in mortgage rates or a surge of new listings would jumpstart the housing market.
But that’s not what happened this spring. In fact, new listings are down 24% compared to this season last year, while the total number of homes on the market is down 8% — marking the biggest plunge in over a year.
As mortgage rates remain well over 6%, homeowners are reluctant to put their homes for sale and lose their below-market rates.
“But even though there wasn’t much of a spring homebuying season this year, there was a spring building season,” Marr notes. Construction of new single-family homes is close to its highest peak in nearly 20 years.
“That means there’s hope for more listings somewhat soon, with homebuilders working to fill the inventory bucket.”
Mortgage applications slightly increase
Demand for mortgages inched up 0.5% from last week, according to the Mortgage Bankers Association (MBA).
Refinance activity dropped by 2% — and is 40% lower than the same week a year ago.
Joel Kan, vice president and deputy chief economist at the MBA, pointed to a notable 3% gain in loans backed by the Federal Housing Administration.
Since first-time buyers account for a large share of FHA loans, he says, “this increase is a sign that while buyer interest is there, activity continues to be constrained by low levels of affordable inventory.”
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