‘The savings and income needed to qualify for a home loan have skyrocketed’: 5 ways the housing market left buyers in the dust — and it’s not over yet

The housing market is finally catching up after a two-year sprint. A new report explains how the frenzy developed.

The report, called “The State of the Nation’s Housing 2022” by the Harvard Joint Center for Housing Studies, reveals the sharp rise in costs associated with owning or renting a home, and how it has intensified. competition between buyers.

With average home prices exceeding $ 400,000, owning a home has become much less affordable for the average potential buyer.

According to Realtor.com, the national average price of active listings was $ 447,000 in May 2022, 17.6% more than last year, and an increase of 35.4% over May 2020.

To afford a mid-priced home, a buyer should reduce their income by more than 38%, according to the Atlanta Fed Home Property Affordability Monitor.

Some 67 of the top 100 real estate markets experienced record appreciation rates at some point in the past year, according to the report.

House prices set new records

And this environment is likely to persist a bit, considering the end of the inventory. In May, homes remained on the market for only 16 days on average, which is the lowest figure recorded, according to the National Association of Realtors.

“Unlike the previous period, when loose credit and speculative buying fueled a housing bubble, the current rise in house prices largely reflects years of underbuilding,” the report explains.

Supply chain constraints, labor shortages, regulatory constraints that strangle home builders are all to blame for the slow pace of new construction.

House prices and apartment rents soar

Renting has also become less affordable. “The cost of owner-occupied and rented housing continues to rise,” the authors of the Harvard report said.

Rents rose 12% nationally in the first quarter of this year, and more in some metropolitan areas.

Although rents fell in big cities like New York during the pandemic, the rise in the return to work environment has been strong. In the first quarter of 2022, rents for apartments in New York increased by 20% compared to the previous year.

Rents for single-family homes rose even faster, 14% in March 2022 compared to the previous month.

Growth in demand for apartments compared to supply

Demand for rental units has really increased over the last year.

“A number of temporary factors helped drive rental demand in 2021,” the report explains.

“Federal cash supports, student loan deferrals, and job recovery probably increased the incomes of many young adults enough to afford the luxury of forming their own homes,” the authors said.

“Other government interventions have protected millions of tenants [who were] backward with their eviction rents. High prices and scarce supply of homes for sale also played a major role in increasing demand, keeping many potential buyers in rental housing, ”they added.

The share of investors in home buying is increasing

Part of the pressure in both markets comes from the rising share of investors in the rental market.

The share of investors in the sale of single-family homes in the first quarter of this year reached 28%, the report states, citing data from CoreLogic, which increased from 19% a year ago. Between 2017 and 2019, the share of investors in the sale of single-family homes was 16% on average.

Investors have focused on the south and west, according to the report. In the last quarter of 2021, the largest investor share of home sales was recorded in Atlanta, with 41%, followed by San José with 38%, Phoenix and Las Vegas with 36%.

To make matters worse, investors are targeting lower-priced homes, outperforming first-time buyers.

“In September 2021, investors bought 29% of the homes sold in the lower third for the sale price in the metropolitan area, compared to 23% of the homes sold in the upper third,” he said. report. “Investor-owned homes are typically converted from owner-occupied units to rents or upgraded for resale at a higher price.”

Mortgage payments are on the rise

The Harvard report estimates that payments for a mid-priced home have risen by more than $ 600 a month.

In its efforts to combat rising inflation, the Federal Reserve raised interest rates, which pushed up mortgage rates sharply. The average rate on a 30-year fixed-rate mortgage has exceeded 6%, according to Mortgage News Daily.

“As prices continue to rise along with interest rates, the savings and income needed to qualify for a home loan have skyrocketed, increasing financial barriers for middle-income and first-time buyers. “The report states.

It is a costly proposition to have a home with current conditions: If you are a first time buyer paying a 7% down payment on a mid-priced home, it would have amounted to $ 27,500 in April 2022, according to the report. .

That amount “would only rule out 92% of tenants, whose average savings are only $ 1,500,” the authors added.

To afford a mid-priced home, the minimum annual income needed to pay high initial payments has increased from $ 79,600 in April 2021 to $ 107,600 in April 2022.

Write to: aarthi@marketwatch.com

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