Housing Market Outlook: Challenges and Trends
Kenny Porcari, the chief market strategist at Slate Stone Wealth, shared insights on the role of AI, the impact of SpaceX’s IPO on investor expectations, and offered a market outlook during an interview on Varney & Company.
The prospects for homebuyers might not be looking significantly better in the near future. A recent report highlights that individuals should not hold out hope for a return to pre-2022 affordability conditions.
According to Sarah Wolf, a senior economist and strategist at Morgan Stanley, while some gradual improvements may occur, a return to historically favorable affordability is quite unlikely as the housing market adjusts to a high-cost, low-supply environment.
There was a moment of optimism back in February when mortgage rates dipped below 6%, but that was short-lived. They’ve bounced back to around 6.5% and have hovered above the 6% mark since then, which has stifled any possible momentum in the housing market.
“Recent trends demonstrate this phenomenon,” Wolf noted. “Today’s market remains historically tense, with small fluctuations in interest rates dramatically affecting affordability, mainly due to this heightened sensitivity to interest rates.”
Income Needed for Median-Priced Homes Almost Doubled Since 2020
Wolf observed that if we look at the housing landscape from 1990 to 2021, affordability was roughly 15% better than what we see today. Even minor improvements in affordability now are stark compared to cycles we’ve witnessed over the past few decades.
For instance, Morgan Stanley estimates that potential buyers of median-priced homes are currently facing monthly payments around $2,000, which is essentially double what it was five years ago.
Midwest and Southern States Are Leading in Housing Affordability
Homeowners on low mortgage rates are hesitant to sell and take on new mortgages as higher interest rates have exacerbated affordability challenges for new buyers.
“Rising financing costs are discouraging sellers from acting. Approximately 70% of existing homeowners have mortgage rates under 5%, and around half have rates below 4%. Therefore, moving or taking out a new mortgage at current rate levels is perceived as too costly,” Wolf mentioned, noting that home turnover is at its lowest in nearly four decades.
The shortage of existing homes is making new constructions increasingly important in the supply chain. While price increases have decelerated in certain areas, shortages linger in others, and supply hasn’t ramped up swiftly enough to significantly lower entry barriers.
Projected Median Home Prices to Reach $1 Million by 2050
Despite the challenges, construction of new homes is helping the housing market’s supply issue, though not at a pace that will dramatically enhance affordability.
The ongoing affordability issues are also shifting the characteristics of homebuyers. The average age of a first-time homebuyer remains around 36, but their credit score has risen from 718 in 2019 to 734 currently.
Moreover, first-time buyers are now taking on heftier mortgage amounts—averaging around $334,000 by 2024, a significant increase from $240,000 in 2019. This surge is outpacing inflation, as buyers increasingly search for homes in more affordable areas.
Wolf pointed out that there’s a chance for slight improvement in housing affordability if interest rates stabilize and home price growth slows. Interest rates could relax to around 5%, leading to a potential drop in mortgage payments from about 24% of household income to roughly 21% over the next decade. However, that’s still above the 15% level seen after the financial crisis of 2007-2009.
Market Changes Ahead
“Morgan Stanley’s modeling suggests that even if mortgage rates settle around 4%, 5%, or 6%, affordability will not reach prior peak levels. It’s becoming more probable that mortgage rates will settle closer to 6% rather than 5%,” Wolf emphasized. “In essence, while the market hasn’t collapsed, it is resetting to a more constrained state.”
Wolf concluded, “Staying on the sidelines hoping for favorable prices to return over the next couple of decades might not be the best strategy. Instead, it’s better to consider buying when the economic situation allows and when suitable opportunities arise.”
