Housing Costs Squeeze Buyers
August 17, 2023–Even as mortgage rates in the United States hover at a 22-year high, the housing sector continues to defy logic by rising in price. In fact, increasing costs of shelter in the United States were “by far the largest contributor” to the inflation rate, according to the latest CPI report. The cost of housing rose by an annualized rate of 7.7 percent last month. Meanwhile, the overall inflation rate stood at 3.2 percent.
The unusual resilience to rate increases by the Federal Reserve has led Goldman Sachs to revise its prediction for the sector from a drop of 2.2 percent to a rise of 1.8 percent, several news outlets including Axios reported.
An ‘Aberration’ of Trends
The investment firm described the unusual occurrence as “unsustainable adaptations to elevated mortgage rates,” according to reporting in the New York Times. Furthermore, its analysts said the average debt-to-income ratio on purchase mortgages of 38 percent is a “significant aberration” of trends.
Housing Affordability Sinks
As the average mortgage rate has doubled in just a few years from 3.17 percent in 2020 to 6.79 percent in June 2023, the average monthly mortgage cost jumped from $1,035 in 2020 to $2,167, the National Association of Realtors reported. That means homebuyers in the United States are spending twice as much on housing as a percentage of their income than they did just a few years ago. Today, home loans cost about 7.31 percent. Mortgage rates tend to follow yields on the 10-year Treasury notes, and those hit a high last seen in 2008.
So why the resistance to the Fed’s tightening? It could be a simple case of supply and demand as far as many new analysts can tell.
