JRE - New Homes Becoming Even More Unaffordable With Rising Mortgage Rates
2023-09-07 09:45:00 ET
Summary
- The median household income is about 18% of the value of the median new home being sold in the U.S. in recent months.
- The raw measure of affordability has been improving because the median sale price of new homes has been falling, while median household income has been rising.
- For the majority of American new home buyers, rising mortgage rates are making new homes more unaffordable.
One hundred and twelve years ago, Americans could buy a house straight out of the Sears catalog. One such example from the 1911 Search Catalog is " Modern Home No. 165 ", which anyone with $1,248 could buy. Land not included, some assembly required. Electricity, plumbing fixtures, etc. available as add-on options.
That's the equivalent of $40,158 after adjusting this figure to be in terms of 2023's U.S. dollar. It's also 3.7 times the average income per capita of $333 for an American in 1911.
Even though it wasn't included, since land was dirt cheap at the time, that cost of would be considered very affordable today. We estimate the trailing twelve-month average of the median new home sold in July 2023 is a little shy of 5.6 times the income of a family earning the trailing twelve-month average of the median household income in the U.S.
Flipping that ratio, the median household income is about 18% of the value of the median new home being sold in the U.S. in recent months. Believe it or not, that's an improvement in this raw measure of relative affordability for new homes, which bottomed at 16.9% in December 2022.
The raw measure of affordability has been improving because the median sale price of new homes has been falling, while median household income has been rising.
Of course, the "raw" relative affordability is only relevant to new home buyers who don't need a mortgage. Since most new home buyers do in fact need to take out a mortgage to buy a house in today's real estate market, we need a more refined measure of relative affordability. We calculate the monthly mortgage payment for a new home sold, assuming a zero percent down payment and the average mortgage rate for the month, and divide that result by monthly median household income. For July 2023, because mortgage rates rose, the mortgage payment for a new home sold at the median price recorded in the U.S. would consume over 41% of the monthly income of a family earning the median household income.
That puts the typical new home sold in the U.S. well out of the affordable reach of the typical American household.
It also puts the cost of paying the mortgage on a new home sold in the U.S. above the peak of unaffordability achieved during the housing bubble of the early 2000s once again.
For the majority of American new home buyers, rising mortgage rates are making new homes more unaffordable. We already know mortgage rates increased in August 2023, so we anticipate that the just-ended month will show new homes have become less affordable when its data becomes available.
References
U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [ Excel Spreadsheet ]. Accessed 23 August 2023.
U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [ Excel Spreadsheet ]. Accessed 23 August 2023.
Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [ Online Database ]. Accessed 1 September 2023. Note: Starting from December 2022, the estimated monthly mortgage rate is taken as the average of weekly 30-year conventional mortgage rates recorded during the month.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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New Homes Becoming Even More Unaffordable With Rising Mortgage Rates