Written by Sophia Watha
Whether it is the supermarket, a salon, or a car dealership, prices have been rising everywhere, and the housing market is no exception. Americans who are looking to buy a home are currently limited to two options: either buy a house for an extremely high price or do not buy a home at all. The housing market is currently in an affordability crisis (Rothstein, 2023), and there are several factors as to why this is.
One of the main reasons is that the housing market is as competitive as ever, with demand surpassing the supply of houses on the market (Rothstein, 2023). Homeowners with low fixed mortgage rates are staying put as it is difficult to find alternative housing at an affordable price (Rothstein, 2023). This can make it difficult for potential buyers to find a home, as there is a low supply of houses on the market (Friedman, 2023), and the ones that are for sale tend to be unaffordable for many.
Another major contributor when purchasing a house is mortgage rates, which have risen drastically over the past few years. Higher mortgage rates have caused the affordability of houses to be the lowest it has been in decades (Friedman, 2023). In August, the average 30-year fixed mortgage rate was 7.23%, the highest it has been since 2001 (Eisen, 2023). Purchasing a home has become extremely unaffordable for some borrowers as monthly payments will be much higher. Higher mortgage rates also result in higher interest, leading home buyers to have to pay an additional hundreds of thousands of dollars in interest alone (Eisen, 2023).
Mortgage rates are not the only thing going up. Houses themselves have taken substantial price increases and are almost at an all-time high (Vukelich, 2023). The average price of a home is $416,100 in the United States, which is almost $100,000 more than in 2020 (Caporal, 2023). The number of homeowners that are now “cost-burdened” by their monthly rent is at a record high (Chang, 2023), with 3 in 10 US homeowners considered to be “cost-burdened” (The Georgia Virtue, 2023) and spending over 30% of their income towards housing (Chang, 2023). On average, monthly mortgage payments are about $2,000, which is outpacing wage growth (Chang, 2023).
General inflation also has had an impact on the housing market. Although inflation appears to have calmed recently, this decrease in inflation has not driven down the price of homes (Vukelich, 2023). Another factor that affects the price for houses is location and cost of living (Vukelich, 2023). Although there is an overall increasing trend of housing prices all over the United States, some places are experiencing higher costs more drastically than others. For example, Washtenaw County, Michigan experienced about a 67% increase in rent from 2020 to 2023, whereas Macomb County, Michigan only experienced about a 19% increase within the past three years (Chang, 2023). The main reason some places experienced more drastic price increases in homes than others is due to the supply and demand of homes in that specific area (The Investopedia Team, 2023). For example, if one county has a higher demand to live there with a low stock of houses on the market, the prices of for-sale houses naturally tend to be more expensive (The Investopedia Team, 2023). However, there was a general increase in almost every United States county, regardless of where it was located (Chang, 2023).
Why is there not an effort being made to combat housing prices, especially when other goods and services are on a price decline (Vukelich, 2023)? One explanation is simply because homeowners are benefiting from the price increases in the housing market (Chang, 2023). Having already purchased their homes, current homeowners most likely have lower fixed mortgage rates (Araj, 2023). Therefore, homeowners who have purchased their homes years prior are not being affected by the increasing interest rates. Additionally, the property value of the owner’s home would be increasing, allowing individuals to sell their house for a higher price (Wang and Liang, 2022). Some researchers believe, specifically those at The Guardian, that since some individuals are benefiting from the increasing home prices, politicians are not aware that it is not a nationwide issue that needs to be addressed; it is only potential home buyers that are being affected (Chang, 2023).
Unfortunately, experts predict that it will be a while before the housing market will recover (Rothstein, 2023). There are two main factors that need to change in order for housing to become more affordable: supply of homes need to increase, and interest rates need to decrease (Rothstein, 2023). Federal Reserve policymakers are keeping rates elevated and it is unclear when cuts to these rates will occur (Rothstein, 2022). Housing market experts are unsure when prices of homes will start to decline, but many predict that the high housing prices will last into 2024 (Rothstein, 2023).
Sources
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“How Finding a Home in America Became so Absurdly Expensive.” The Guardian, Guardian News and Media, 10 May 2023, www.theguardian.com/us-news/2023/may/10/us-housing-market-prices-increasin.
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