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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 be able to purchase a typical home in the U.S. according According to a new report from Redfin, an online real estate brokerage firm, the drop is 1% from a year ago and represents the first decline since 2020.
Housing payments recorded the biggest drop in four years, Redfin also foundThe average mortgage payment was $2,534 during the four weeks ending Sept. 15, down 2.7% from a year ago.
Both declines are due to lower mortgage rates, said Daryl Fairweather, chief economist at Redfin.
As of September 19, the average 30-year fixed mortgage rate is 6.09%, down from 6.20% the previous week. according According to data from Freddie Mac via the Fed, rates peaked this year at 7.22% on May 2.
“The only reason mortgage payments are down is because of the rate effect,” Fairweather said.
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Challenges remain: The typical household earns 27% less than what it needs to buy a home, about $84,000 a year, according to Redfin data. Home prices also remain high. The median sales price for newly listed homes is $398,475, up 5.4% from a year ago, according to Redfin.
While housing overall remains unaffordable for most buyers, “this is as good as it gets,” said Orphe Divounguy, senior economist at Zillow, as the broader market is seeing lower mortgage rates, more inventory and low buyer competition.
Here's what buyers can expect in the coming months.
'Mortgage rates will depend on the economy'
Lower interest rates on home loans provide “a great opportunity for buyers who have been waiting,” Divounguy said.
The fact that the Federal Reserve has cut interest rates “doesn't necessarily 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 bond yields and other economic data..
“Mortgage rates will follow the course of the economy,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
“If the economy shows signs of weakening … interest rates will come down,” Cohn said. “If we see the opposite, and the economy is moving forward at a steady pace and employment is strengthening, then rates are likely to go up.”
More houses are coming onto the market
In addition to lower mortgage rates, a higher inventory of homes for sale makes the housing market more favorable for buyers, Divounguy said.
At the end of August there were 1,350,000 homes for sale, 0.7% more than the previous month, according According to the National Association of Realtors, the inventory level increased by 22.7% compared to August 2023.
Meanwhile, homebuilder confidence in the newly built single-family home market improved in September. according According to the National Association of Home Builders (NAHB), the survey also shows that the share of builders who reduced prices in September was 32%, down one point. This is the first drop since April, according to the NAHB.
“That tells me that some builders are probably starting to see an increase in foot traffic,” Divounguy said, and that the market could become competitive again.
Price growth will depend on the level of existing home inventory, said Robert Dietz, chief economist for the National Association of Home Builders.
“The inventory of existing homes is expected to increase as the mortgage rate lock-in effect subsides, which will also put some downward pressure on prices,” Dietz said.
Wait and you will “exchange one difficulty for another”
Fairweather said the housing market is not going to get any worse overall over the next 12 months. If home seekers are discouraged because they haven't found one, they may have a better chance next year when there are more properties for sale, Fairweather said.
But they risk facing increased competition, he warns.
“You're trading one difficulty for another difficulty,” Fairweather said.
If mortgage rates continue to fall next year, the number of homes for sale could increase. Most homeowners are sitting on loans with historically low mortgage rates, creating a so-called “lock-in effect” or “golden handcuffs” effect, where they do not want to sell and finance a new home at a higher rate.
“We'll probably see more people buying or selling to buy again,” Fairweather said, because high borrowing costs are holding them back.