WHEN ESCALATING HOME PRICES ARE MATCHED WITH MUCH HIGHER MORTGAGE RATES, HOME AFFORDABILITY DRAMATICALLY WEAKENS AND RESULTS IN FEWER BUYERS ABLE TO MAKE A PURCHASE.
In looking at home affordability it is critical to look at home prices, household incomes, and the prevailing mortgage rate. Home values have risen sharply since the start of the pandemic. In fact, the national Case-Shiller Home Price Index increased by 20.6% year-over-year in March, a record rise. Higher prices were not a problem when rates were in the two’s and three’s and buyer demand was through the roof; however, today’s 5.25% mortgage rate, according to Mortgage News Daily, is a significant jump that has squeezed buyers swiftly. As a result, the demand for Orange County Housing has weakened.
Skyrocketing home values were not a problem in 2020 and 2021 when rates reached 17- record lows. But, as rates have climbed from 3.25% to 5.25% in just a few months, home affordability has rapidly eroded like a sandcastle at high tide. Many potential home buyers no longer qualify to purchase a home, or their purchasing power has greatly diminished. A payment on a $1 million home with 10% down at the start of the year was $3,917 at 3.25%. Today, it is $4,970 at 5.25%, a $1,053 per month rise in the first five months of the year. Additionally, a buyer looking to spend $4,000 per month was touring homes at a $1,021,111 at the start of January. Today, that same buyer is now considering homes at $804,444. Their purchasing power plunged by nearly $217,000.
The Bottom Line: The quick rise in mortgage rates has substantially eroded home affordability and the Orange County housing market is rapidly cooling. It all boils down to the monthly payment.
When the monthly payment climbs out of reach for many home buyers, demand cools. The housing frenzy is quickly coming to an end. Sellers need to be careful in navigating the new housing landscape. Carefully pricing is fundamental in order to find success.