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Mortgage Affordability Hasn't Been This Bad Since 2008. When Will It Get Better?

By Matthew Frankel, CFP® – Oct 14, 2021 at 6:26AM

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Even record low interest rates haven't been enough to keep homeownership affordable.

It now costs a greater percentage of the average American's salary to buy a home than at any other time since the financial crisis. In this Fool Live video clip, recorded on Oct. 4, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss what is making homeownership so unaffordable, and whether any relief could be on the way.

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Jason Moser: According to the Federal Reserve Bank of Atlanta, the median American household would need 32.1% of its income to cover mortgage payments on a median-priced home. Now that's the most since November of 2008 when that number was 34.2% of income. Clearly, there is a confluence of events going on right now, pushing house prices up. It feels like we're getting to a point we're seeing some signs. You're seeing a lot of folks that are being priced out of the housing market again. We've seen how that shakes out historically, but what do you make of this data?

Matt Frankel: One, it's not just that mortgages are getting less affordable, it's that they're getting less affordable very quickly. When you think like, let's start at this, the beginning of 2020, before the pandemic hit, when the pandemic hit, mortgage rates plunged from about 4% to under 3%. Home prices stayed relatively flat for the first six, seven months of the pandemic, that made home prices more affordable, and not to mention all existing homeowners were refinancing getting their mortgage payments down. I know my mortgage payment fell in 2020, I'm sure yours did, too. I think you refinanced, you said.

Moser: We refinanced, absolutely.

Frankel: What you're seeing now is a perfect store of factors that are not letting almost become affordable. 23% year-over-year price gains in the median home in America, 23%.

Moser: That's not even close to normal.

Frankel: No, normal is about 3%. Home prices generally keep up with inflation, which is about 3% a year. The problem is, there are some factors that are helping homes become more affordable. Wages are up 3% year-over-year, for example. That makes affordability a little bit better. Interest rates are still way below where they were at the beginning of 2020. But just to put that in perspective, the difference in a 30-year fixed rate mortgage payment between a 4% mortgage rate and a 3% mortgage rate is about 12%. So when you have home prices rising by 23% year-over-year and the cost of an X amount mortgage falling by only 12%, you can see how that doesn't really work in the buyer's favor.

Moser: Doesn't line up.

Frankel: Homes are definitely becoming less affordable and it's due to higher home prices. But that's caused by things like low inventory, a labor shortage that's affecting homebuilders, supply chain shortages that are affecting homebuilders. Homebuilders all of the big backlog, some even stopped taking new orders, it's a big inventory gap right now that's driving home prices higher. Who knows how long it's going to last. Home prices are generally more stable than the stock market. Anything that can rise 23% in a year can fall. I'm curious to see how this plays out.

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