Rising to new heights, housing prices have surged significantly, matched in intensity by the upward trajectory of mortgage rates.
These combined forces serve as a stark indicator that the cherished concept of the American Dream, entwined with homeownership aspirations, is undergoing a profound transformation. The once-attainable notion of owning a home, intertwined with financial security and prosperity, now faces formidable challenges due to these elevated housing prices and heightened mortgage rates.
Nearly two-thirds of American households, a consistently steady proportion over the past ten years, possess the residence they inhabit. Acquiring a home typically stands as the most substantial financial commitment an individual undertakes, with the buying cost often surpassing what one can comfortably cover from their present savings. In the year 2022, approximately 70% of property acquisitions were facilitated through mortgage financing.
Housing Prices Have Increased along with the Interest Rate
Starting in 2022, American consumers faced a rapidly changing housing market as housing prices continued to grow, along with the sharp rise in mortgage rates that occurred alongside the increase in short-term interest rates. Since then, the decline in affordability has been significant.
Assume that in June 2023, a typical American household bought a typical home with an average purchase housing price of about $349,000, financed with a 20 percent equity down payment and a 30-year fixed-rate mortgage with a national average interest rate of 6.71%. This homeowner’s monthly mortgage payment for principal and interest would total about $1,803, marking a 69 percent increase compared to the same measure of December 2021.
The solid line in Figure 1 illustrates this drastic change, showing the interaction of both interest and housing prices increase. You can see the effect of each factor in itself, while the dashes in Figure 1 also show the monthly mortgage path if interest rates or housing prices remained the same while the other continued to increase. The main reason was the higher mortgage interest rates, but rising housing prices added to the challenge of affordability.
Rising housing prices accounted for most of the initial decline in affordability while rising mortgage rates became the dominant factor in mid-2022. The median income of homebuyers increased significantly over the period, which means that the pool of potential homebuyers at the lower end of the income spectrum may be increasingly excluded from the market. In addition, the median income of first-time home buyers is now significantly higher than the median income of US households for the first time in a decade, suggesting that the costs of entering the housing market are relatively high.
To examine actual home purchase trends, we used data on mortgage loans packaged into mortgage-backed securities from one of three US agencies—Fannie Mae, Freddie Mac, and Ginnie Mae (“Agency MBS”) provided by eMBS. , a mortgage and data analytics service.
In the US, certain qualifying mortgage loans can be packaged into mortgage-backed securities (MBS), whose principal and interest payments are guaranteed by a US agency, and sold to investors. The fact that the government would offer such credit facilities is a testament to the economic importance of the housing sector. This loan-level data is generally available monthly with a delay of less than a month, providing timely and detailed information on changes in a borrower’s affordability.
By contrast, data on the Home Mortgage Disclosure Act (HMDA), a database that includes a larger pool of actual mortgages that include loans that are not secured as agent MBS, is available only by mortgage origination year and takes about a year to complete. delay Unlike the HMDA data, the eMBS dataset allows us to examine differences between first-time homebuyers and repeat homebuyers, which is an important distinction. The first-time home buyer is a marginal newcomer to the U.S. housing market, accounting for 40 to 50 percent of all home purchases each year.
Unlike repeat homebuyers, who are at least partially shielded from housing price fluctuations through home equity wealth, first-time homebuyers are exposed to both mortgage interest and housing price increases.
To grasp the current dynamics of consumer affordability, let’s analyze the trends in borrowers’ Debt-to-Income (DTI) ratios. This measure of affordability enables us to compare the burden of mortgage payments and other debt obligations against the total available income to cover them. Figure 2 illustrates the trajectory of DTI ratios for loans securitized by the three U.S. agencies: Fannie Mae and Freddie Mac, government-sponsored enterprises, and Ginnie Mae, a division of the U.S. government.
The distribution of DTI ratios for both agency types, characterized by their 25th, 50th, and 75th percentiles, displayed a noticeable increase in 2020. Since then, the median homebuyer has allocated approximately 3 percentage points more of their income to debt repayments.
By comparing our set of actual mortgage loan transactions to national median figures using indicative data, we make two additional observations from Figure 3 that may signal changing dynamics in the U.S. housing market, especially for first-time homebuyers.
Panel A shows the price difference between first-time home buyers and ZHVI Extended from 2022. The average purchase price for a first-time home buyer averaged 7.5 percent below the typical housing prices, wider than the previous typical difference of about 4 percent. Further analysis would do the factors behind this change must be understood. One possibility is prime purchasing power the share of homebuyers has weakened because they do not have capital gains in the form of equity in their existing home to compensate for increased housing costs.
In Panel C, it becomes evident that commencing in 2021, the calculated median income for real homebuyers exhibited a rapid increase from being closely aligned with the national median to significantly surpassing the 60th percentile of the national median as indicated by ACS data. This shift highlights that individuals purchasing homes with incomes below the median were notably more prevalent in the past compared to the present. This shift in the pattern remains consistent for both repeat and first-time homebuyers, emphasizing the substantial affordability barrier that American consumers must surmount just to step foot into the housing market.
The surge in incomes among individuals in the homebuyer dataset, starting as early as 2021, showcases remarkable trends: 8.5% in 2021, a staggering 19.6% in 2022, and nearly 9% by May 2023. Preceding 2021, the progression of actual homebuyer income growth closely mirrored the income growth estimates of the median U.S. household provided by ACS. Given the unavailability of ACS income growth estimates for 2022 and 2023 for a more recent comparison, we employ two alternative data series as timely approximations of median income growth. These alternative data points are juxtaposed with our own median homebuyer income growth and ACS median household income growth in Figure 4.