Mortgage Rates May Be Low, but Homes Are Still Less Affordable
Mortgage rates have dropped dramatically in recent weeks, but that isn't making them easier to buy.
Read the news, and you'll see that mortgage rates are hitting historic lows. Just last week, the average rate for the 30-year mortgage fell to 2.88%. That's truly competitive, and if your credit score is high enough for you to snag a rate in that vicinity, it could certainly help make any new home more affordable.
Or will it?
While low mortgage rates can lead to major long-term savings, you still need to find a home within your price range to take advantage of today's offers. And that may be easier said than done.
Realtor.com's July housing data reveals that newly listed properties declined by 13.4% nationwide over the past year, and it's this lack of inventory that drives home prices up. In fact, home prices have increased 8.5% from last year, so a lot of would-be buyers are shut out.
Data from the National Association of Home Builders and Wells Fargo further drives home this point. Nationally, only 59.6% of new and existing homes sold during 2020's second quarter were affordable for families with an adjusted U.S. median income of $72,900. By contrast, 61.3% of homes sold during 2020's first quarter were considered affordable for median earners. In fact, based on this particular index, home affordability is the lowest it's been since the fourth quarter of 2018. That's why chasing today's mortgage rates may not be the best move.
Why is housing inventory so low?
We can blame the COVID-19 crisis and its associated economic recession for a lack of homes on the market. Many would-be sellers are holding off on listing their homes to avoid the logistical nightmare of having visitors traipse through their properties at a time when social distancing and other precautions are encouraged nationwide. Also, some sellers may be feeling financially insecure during the economic crisis, and it's these same people who may not want to bear the cost and upheaval associated with buying a new place to live and moving into it. Many sellers are sitting tight and waiting things out, leaving buyers with very few options.
Unfortunately, low inventory ties directly to higher home prices. There are fewer affordable homes available right now, and attempting to buy one may not be the best choice. After all, if your goal is to snag a low monthly housing payment, overpaying for a home could negate your mortgage-related savings. And low inventory also means you could wind up settling for a sub-par home that you don't even land a discount on. (Or, to put it another way -- imagine paying $15,000 more for a home than you normally would just to snag a low mortgage, and also having to sink another $15,000 in for unavoidable repairs.)
Of course, if you do manage to find a home you can swing comfortably and you're able to snag a competitive mortgage rate, then you may have success in today's limited housing market. But don't make the mistake of running after historically low mortgage rates and locking in a loan on the wrong home for you.
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