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Americans struggling to find affordable housing will likely see the hardship continue, with prices staying high, even as supply remains low and mortgage rates keep many prospective homebuyers out of the market, according to JP Morgan.
How long will it take for housing to return to average levels of affordability, assuming incomes grow at the current pace, mortgage rates hold steady and home values remain at all-time highs? The answer is 3 1/2 years, JP Morgan reports.
The average sale price for a home in the United States during the third quarter of 2023 was $513,000, according to the St. Louis Federal Reserve, compared to an average home price of $397,800 in the third quarter of 2020.
"Our analysis of the timing is notably sensitive to mortgage rates," the JP Morgan report notes. "If the market's pricing of mortgage rates were to fall by just one percentage point, U.S. homes could be affordable again in just two years."
The average 30-year fixed mortgage rate is 8.246 percent, assuming a credit score of 700 to 719.
No Housing Price Crash Expected
The good news for prospective homebuyers is that home prices should decline in 2024. JP Morgan rival Morgan Stanley anticipates a 3 percent year-over-year decline in U.S. home prices next year, citing an anticipated growth in inventory offsetting demand.
Even though a 3 1/2-year horizon for home affordability might seem discouraging, the positive takeaway, JP Morgan economists say, is that there won't be a home price crash.
"We don't foresee one [a home price crash] coming (thankfully), nor do we think one is necessary to restore affordability at the national level," said the JP Morgan report. "We think time and continued robust income growth can cure the problem on their own."
A housing price crash would lead to homeowners burdened with houses that are worth less than they owe, forcing them to either hold onto these houses until the market recovers or sell them at a loss.
What Is Housing Affordability?
As American homebuyers navigate a troubled landscape, economists agree that it's an uphill battle to housing affordability, which Mark Zandi, chief economist at Moody's Analytics, defines as a household spending less than 30 percent of their income on housing costs.
Zandi told Newsweek that he is sympathetic with JP Morgan's stance that it will take years to restore housing affordability.
"To restore housing affordability requires some combination of lower mortgage rates, higher household incomes and lower house prices, which I expect will play out only slowly," he said. "Most importantly, fixed mortgage rates need to fall below 6 percent on a consistent basis, the economy needs to avoid a recession so that employment and wage growth is sturdy, and house prices must come down by at least 5 percent from their peak."
Zandi's predictions also fall in line with the JP Morgan prediction that housing prices will come down slowly rather than in a crash. These slow declines will happen in part because homeowners with low mortgage rates are loathe to jump into the current high-rate market.
"The price declines will be especially slow to materialize as current homeowners with low-rate mortgages will only move when they face a big life event such as death, divorce, children or a job change," Zandi told Newsweek. "When these households ultimately move, they will need to lower their house price to ensure their home is affordable enough to find a buyer."
Adrienne Kmetz of Glenwood Springs, Colorado, is one of those people who is hesitant to hop into this high-rate market.
"I'm looking for a new home to expand my family, but at these interest rates, I'd be paying almost double the amount I'm paying now for the same mortgage," she told Newsweek. "So, we're waiting until something gives, but in a market where many more people want to live in houses than there are houses, we might be waiting a long time."
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About the writer
Sheri Kasprzak is a Newsweek editor based in Providence, Rhode Island. Her focus is reporting on finance and economy. Sheri ... Read more