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While housing affordability remains a challenge for many buyers in the U.S., conditions are improving somewhat due to lower mortgage rates.
Buyers need to earn $115,000 to afford a typical home in the U.S., according to a new report from Redfin, an online real estate brokerage firm. This is a 1% decrease compared to the previous year and represents the first decline since 2020.
According to Redfin, housing payments posted their biggest decline in four years. The average mortgage payment was $2,534 in the four weeks ended Sept. 15, down 2.7% from a year ago.
Both declines were due to lower mortgage rates, said Daryl Fairweather, chief economist at Redfin.
According to data from Freddie Mac via the Fed, the average 30-year fixed-rate mortgage is 6.09% as of Sept. 19, down from 6.20% the week before. On May 2, interest rates peaked this year at 7.22%.
“The only reason mortgage payments are down is the interest rate effect,” Fairweather said.
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Challenges remain: According to Redfin data, the typical household earns 27% less than it needs to afford a home, about $84,000 per year. Real estate prices are also still high. According to Redfin, the average asking price for new homes for sale is $398,475, up 5.4% from last year.
While housing overall remains unaffordable for most buyers, “it's better than it gets,” said Orphe Divounguy, senior economist at Zillow, as the market generally sees lower mortgage rates, more inventory and low buyer competition.
Here's what buyers can expect in the coming months.
“Mortgage rates will be based on the economy”
Lower mortgage rates present “a great opportunity for buyers who have been waiting,” Divounguy said.
Just because the Federal Reserve has cut interest rates is “not a guarantee that mortgage rates will continue to fall,” he said.
While mortgage rates are partly influenced by Fed policy, they are also tied to Treasury yields and other economic data.
“Mortgage rates will follow the economy,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
“If the economy shows signs of slowing, interest rates will go down,” Cohn said. “If we see the opposite and the economy progresses and employment increases, it is entirely possible that interest rates will rise.”
More and more houses are coming onto the market
In addition to lower mortgage rates, a higher inventory of homes for sale is making the real estate market more affordable for buyers, Divounguy said.
According to the National Association of Realtors, 1,350,000 homes were for sale as of the end of August, an increase of 0.7% from the previous month. This inventory increased by 22.7% compared to August 2023.
Home builders' confidence in the newly constructed single-family home market improved in September, according to the National Association of Home Builders (NAHB). The survey also shows that the proportion of builders who cut prices in September was 32%, down by one point. According to the NAHB, it is the first decline since April.
“That tells me that some developers are probably seeing some increase in foot traffic,” Divounguy said, and that the market could become competitive again.
Price growth will depend on the level of existing housing inventory, said Robert Dietz, chief economist at the NAHB.
“The inventory of existing homes is expected to increase as the mortgage rate lock-in effect weakens, which also puts some downward pressure on prices,” Dietz said.
Wait and “you trade one difficulty for another”
The real estate market will not generally deteriorate over the next 12 months, Fairweather said. If house hunters are discouraged because they haven't found a home, they may have a better chance next year when there are more offers, Fairweather said.
But they risk increased competition, she warned.
“You’re trading one difficulty for another,” Fairweather said.
If mortgage rates continue to fall next year, the number of homes for sale could increase. Most homeowners are stuck 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 interest rate.
“We're probably going to see more people buying or selling to buy again,” Fairweather said, as high borrowing costs held them back.