According to Andy Walden, the ICE vice president of enterprise research, the current housing market is facing extreme unaffordability, and three hypothetical scenarios would have to play out in order for it to return to pre-pandemic affordability. Walden stated that one of these scenarios would involve a sharp spike in US incomes, with incomes needing to increase by 55% for the current market to be considered affordable. Alternatively, home prices would have to crash by 35% or mortgage rates would need to drop by four percentage points.
Walden explained that there is potential for movement in the market, but the lack of inventory is keeping prices elevated instead of pulling back as rates rise. He described the latest housing data as "red-hot" coming into August, with buying power still down by around 6%. Walden also noted that demand has reached its lowest point during the pandemic over the past three weeks, further constraining the market.
The combination of higher mortgage rates and soaring prices has severely impacted affordability in the US. Rates on the 30-year fixed mortgage are near two-decade highs and are approaching 8%. For buyers putting a 20% down payment on a $400,000 home, the monthly mortgage is approximately $930 more expensive compared to pandemic lows.
The impact of these factors is evident in the mortgage application data, which recently showed a plunge to the lowest level since 1996. Walden attributed this decline to the interest rate lever that is driving down demand and also pulling down supply. He stated that supply is currently 8% lower than it was last year, with 70% of markets experiencing a year-to-date decline on a seasonally adjusted basis.
In summary, the current housing market is facing extreme levels of unaffordability, and it would require significant changes in incomes, home prices, or mortgage rates for it to return to pre-pandemic affordability. The lack of inventory and the impact of higher mortgage rates have contributed to the current state of the market, with both demand and supply being affected.