What this article covers
Opher Ganel explains why buying a home became so expensive: a US shortfall of more than 3 million homes, prices up 96% in a decade and 30-year mortgage rates that peaked at 7.79% in late 2023, pushing the income needed for an average home beyond the reach of most Americans. He then lays out four factors that could restore affordability, from easing rates and the release of homes locked in by low-rate mortgages to the National Association of Realtors commission settlement, with perspective from four financial advisors.
Key Takeaways
Homes became unaffordable because a housing shortage collided with a near tripling of mortgage rates
The US is more than 3 million homes short of demand, and the Case-Shiller national average price reached about $562,700 in October 2023, up 96% in ten years. With 30-year rates at 7.79%, buying that home with 15% down meant principal and interest of about $3,440 a month and total housing costs of over $51,000 a year.
The mortgage rate lock-in effect keeps homeowners from selling and keeps supply tight
In late 2023, over 80% of existing mortgages carried rates below 5%. Moving to a similarly priced home at 6.74% would raise a 5% borrower’s payment by nearly $530 a month and a 3% borrower’s by about $1,080, so many owners stay put unless they must relocate.
Lower rates, more high-rate owners and the NAR settlement could make homes more affordable
Falling mortgage rates both cut payments and release locked-in homes, while more than 10% of the housing stock was bought at rates above 6% and is no longer held back by lock-in. The National Association of Realtors’ $418 million settlement may also reduce commissions, and advisors interviewed expect prices to stabilize or grow slowly rather than collapse.
Anthony Ferraiolo
Bill Promes
Alison RothThe “American Dream” of homeownership seems to drift ever further away.
Between dramatic increases in home prices and even more dramatic hikes in mortgage interest rates, far too many find themselves priced out of the market.
Why Is It So Expensive to Buy a Home? Prices, Rates and a Housing Shortage
The simplest answer is mostly right – the US is facing a huge shortfall of housing relative to demand. According to Axios, the US housing market is over 3 million homes short of what’s needed.
Looking at my zip code, there are 19 homes for sale now, about one month’s supply – an extreme sellers’ market. For a balanced market, we’d need to see 5-7 months’ supply.
This explains why, according to the St. Louis Fed, average home prices peaked at about $562,700 in October 2023 (per the so-called “Case-Shiller US National Home Price Index”), up 96% from October 2013 levels, before receding by less than 1% to ~$559,200 in December 2023.
Add to that, according to the Fed again, the average 30-year fixed mortgage rates climbed ~2.6×, from ~3% in 2021 to a peak of 7.79% in late 2023, before sliding to 6.74% this month.
Combining these effects, in late 2023, someone who wanted to buy the $562,700 (Case-Shiller “average” home) last October with the median downpayment of 15% and the then-current 30-year mortgage rate of 7.79% would have faced monthly payments (principal and interest) of $3440.
That’s over $41k a year.
Add to that $147 a month for homeowner’s insurance, 1% of home value for property taxes, and 0.5% of the loan amount for private mortgage insurance (required for loans higher than 80% loan-to-value) and you’re over $51k!
To afford this, assuming $350 in other monthly debt payments and a lender requiring a debt-to-income (DTI) or “back-end ratio” of 43%, you’d need to earn nearly $119k.
According to DQYDJ.com, that rules out about 86% of Americans!
Anthony Ferraiolo, Partner Advisor of AdvicePeriod, tells clients facing this situation:
If you need a home and can afford one where you can live in comfort, don’t stretch your budget expecting to ‘grow into it.’ Even with that guideline,” he concedes, “it’s been a challenging market.
His advice?
“Consider adjustable-rate mortgages (ARMs) that could reduce interest rates by nearly 1%, aiming to refinance within 3-5 years to a fixed loan with rates that are hopefully at least 1% lower. But be aware that this comes with some risk. If it’s relevant for you, you could also consider moving to a lower-cost location that may be too far for a regular commute but doable if you’re a remote worker or have to go into the office just once a week.”
Why Is Housing Supply So Tight? The Mortgage Rate Lock-In Effect
For the recent $559,200 home price, with the same 15% down, a 6.74% mortgage interest would result in a $3080 monthly principal and interest payment.
According to CNBC, in late 2023, over 80% of existing mortgages had interest rates below 5%.
What does that mean?
Simple.
If you have a 5% mortgage and want to sell to move to a similarly priced home, your new monthly payment would be nearly $530 higher!
If your mortgage is at 4%, that would be over $810 a month more! At 3%, it’s $1080!
If our hypothetical homeowner with a 3-5% mortgage wants to upgrade to a more expensive home, those numbers just get worse.
Is it any wonder people are reluctant to sell (unless they need or choose to relocate, or they pass away and their heirs don’t want to keep their parents’ home)?
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4 Factors That Could Make Homes More Affordable
First, as mentioned above, mortgage interest rates are starting to come down. Currently, they’re down just over 1 percentage point (about 13.5%) down from their peak. That makes current mortgages a little less unaffordable.
Once the Fed starts cutting rates, mortgages will drop lower, likely to 6% or even under 5% over the coming year or two, making mortgages more affordable, even if home prices don’t drop. Note that the Fed doesn’t set mortgage rates, but they do set market expectations, which does impact mortgages indirectly (albeit not on a one-to-one basis).
Second, as alluded to above, lower mortgage rates will release more homes from the “golden handcuffs” of low locked-in interest rates.
When current rates approach 5%, homeowners with fixed rates between 4% and 5% will be more inclined to sell, increasing supply and hopefully pushing home prices down.
Third, a growing fraction of homeowners will have purchased their homes with mortgages at fixed rates of 6-8%.
Extrapolating from Statista data, nearly 12 million homes were purchased in late 2022 and 2023 when rates exceeded 6% – over 9% of the 129 million total homes in the US. Estimating another million homes sold thus far in 2024, we have over 10% of the national housing stock no longer locked by super-low existing mortgage rates.
Ferraiolo adds:
If unemployment ticks up, prices could fall because people who lose their jobs may be forced to sell. Another factor is that boomers are starting to downsize or relocate to retirement-friendly states.
Finally, the New York Times reported, “The National Association of Realtors, a powerful organization that has set the guidelines for home sales for decades, has agreed to settle a series of lawsuits by paying $418 million in damages and by eliminating its rules on commissions… Economists estimate that commissions could now be reduced by 30 percent, driving down home prices across the board.”
This means that sellers will no longer be forced to accept 6% realtor commissions, allowing them to (keep more of their home’s sale price or) offer some support for buyers.
Bill Promes, Financial Planner, Austin Creek Capital, adds:
The recent settlement from the National Association of Realtors may help with the supply of housing as well. Now that sellers won’t be required to offer compensation to buyers’ agents, that saving may tip the scales for a homeowner who isn’t sure that what’s left after closing is enough to make selling worthwhile. That combined with more favorable interest rates may shake loose more inventory in this tight market.
Will Home Prices Drop? How More Supply May Play Out
As long as the supply of homes for sale is so tight, it’s hard to see sellers reduce their asking prices.
However, the above factors will help release more and more supply to the market, leading to a more balanced market, or even to a buyer’s market.
Once this happens, home prices will likely stabilize or even drop some.
Spiros Vassilakos, CEO & Private Wealth Advisor at Athenian Private Client Group, agrees:
If interest rates decrease in the next year or two as anticipated, we may see an increase in mortgage applications. In addition, prices may stagnate, with possible gradual increases in places where the population is growing, such as much of Florida, Texas, and Tennessee.
The Bottom Line: Lower Rates Could Unlock Supply and Rebalance the Market
Homeownership, long a measure of “having made it,” has become an ever more elusive goal for many, and probably most younger Americans. This dynamic may soon change as mortgage rates continue easing.
Lower rates make mortgages more affordable, but possibly more importantly, lower rates will likely release the pent-up supply of homes that are currently locked out of the market due to ultra-low fixed interest rates on their existing mortgages.
This, along with the ever-increasing number of homes that were purchased with relatively high mortgage interest rates, should balance the real estate market, and potentially push it to a buyer’s market.
However, as Alison Roth, Financial Advisor at AdvicePeriod cautions:
While interest rates have a big impact on demand, other factors do too: inflation, economic growth, unemployment, etc. If interest rates go lower, inflation cools, economic growth slows, and unemployment increases, we may see lower housing prices. That said, these things don’t happen in a vacuum and aren’t one-to-one. Some have a greater impact on supply and demand than others, so it’s difficult to predict these things with any certainty.
Frequently Asked Questions
Why are homes so expensive to buy?
The article points to a shortage of more than 3 million homes relative to demand, combined with mortgage rates that rose from about 3% in 2021 to a peak of 7.79% in late 2023. Together, higher prices and higher rates pushed monthly payments far beyond what many buyers can afford.
What is the mortgage rate lock-in effect?
Homeowners with low fixed-rate mortgages face much higher payments if they sell and buy a similar home at today’s rates, so many choose not to sell. Opher Ganel calls this the ‘golden handcuffs’ of low locked-in rates, and it keeps the supply of homes for sale tight.
Will lower mortgage rates make homes more affordable?
Lower rates reduce monthly payments even if prices don’t fall, and they may matter more by encouraging owners with 4% to 5% mortgages to sell. That added supply could move the market toward balance and help stabilize or lower prices.
How could the NAR settlement affect home prices?
The National Association of Realtors agreed to pay $418 million and eliminate its rules on commissions, and economists cited by the New York Times estimated commissions could fall by 30 percent. One advisor interviewed said the savings may persuade hesitant homeowners to sell, adding inventory to a tight market.
What can homebuyers do while prices and rates are high?
One advisor interviewed recommends buying a home you can live in comfortably rather than stretching your budget to ‘grow into it.’ He also suggests considering an adjustable-rate mortgage with a plan to refinance (while understanding the risk), or moving to a lower-cost area if remote work allows.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.