Mortgage rates have been stuck at higher levels for three years now, floating between 6.5% and 7.5% with very few exceptions.
Everything is a lot more expensive compared to 2019, before the pandemic that changed the world and shut down the global economy and trade. Groceries have increased by 28%. Beef is up 52% and eggs are up 87%. The price of dining out at a restaurant is up 32%. New cars are up by 20%, and used cars jumped by 31%. Everyone’s wallets have been stretched.
Nothing was hit harder than housing. Monthly rents have increased by 29% nationwide, and home values soared 51%. Household incomes in California have only increased by 15% since 2019. In looking at home affordability, it is critical to look at home prices, household incomes, and the prevailing mortgage rate. The gap between the rise in home prices and incomes explains why housing affordability quickly became an issue as the pandemic wore on. Then in 2022, mortgage rates rocketed from 3.25% in January to 7.37% in October. Home affordability was squeezed. Not only did prices surge, but the jump in rates created a crisis in home affordability.
During the pandemic, 30-year mortgage rates reached record low levels. In fact, in 2020 and 2021, there were a series of new record lows, with a total of 16 new records reached in 2020, and one in 2021. The lowest rate on record was achieved in January 2021 at 2.65%. Despite rapidly increasing home values (utilizing the Zillow Home Value Index), payments for the typical home in Los Angeles County did not change much. In May 2018, the typical home payment was $2,475. In January 2021, it had dropped to $2,312 due to the record low rate. By January 2022, the payment had grown to $2,919, up $444 per month since May 2018.
As rates climbed in 2022, home values did not stop growing until June of that year, rising 38% from January 2020. The typical house payment grew from $2,919 in January 2022 to $3,649 in April, just a few months later. It eclipsed $4,500 in October 2022 and $4,900 in November 2023. The payment has bounced between $4,400 and $4,900 ever since. In August, rates dropped to their lowest level since last October, 6.5%, and the payment finally improved to $4,465, its lowest level since last September. Even at $4,465, that is still $1,545 more per month, or $18,540 per year, compared to January 2022, before rates rapidly rose.
For home affordability to improve, mortgage rates need to drop further. At the current Zillow Home Price Value for Los Angeles County, $883,000, the payment would drop by $230 per month, or $2,760 per year, if mortgage rates ease to 6%. At 5.5%, it would be a $454 per month or $5,448 per year improvement. The lower the mortgage rates drop, the more home affordability improves. Every half-of-a-percent drop is a substantial increase in home affordability, opening up the pathway to a significant rise in buyer demand.
Many expect home
values to plunge to improve affordability, similar to the Great Recession. Yet,
the Great Recession was fueled by loose lending requirements, pick-a-payment
plans, teaser-rate adjustable mortgages, subprime loans, zero-down loans,
fraudulent lending practices, elevated bankruptcies, and surging delinquencies,
short sales, and foreclosures. Today’s U.S. housing stock is the healthiest
ever: 40% own their homes free and clear, record equity-rich (50% plus equity),
low fixed-rate mortgages, large down payments, strong credit, tight lending
requirements, and great jobs. The national delinquency rate is at 3.35%,
considerably lower than the nearly 4% level before the pandemic, or the 4.27%
average between 2000 and 2005.
Prices could drop in the low single digits due to increased inventories that
are approaching pre-pandemic levels, but there is no path to plunging prices. This
year's supply is higher than in the past couple of years, and it is being
matched against similar year-over-year ultra-low demand levels that have
remained unchanged since rates exceeded 7% in October 2022. There are currently
14,944 homes on the market in Los Angeles County, 31% more than last year’s
11,403 level, and nearly double 2023’s 7,880 homes. Despite the higher mortgage
rate environment, home values climbed in 2023 due to a limited inventory. In
2024, they continued to climb, but at a slower pace, due to a higher inventory.
This year, home values are starting to slowly fall as the inventory makes its
way towards 2018 levels.
The slight declines in home values only help home affordability improve
marginally. In the end, it will take a significant drop in mortgage rates to
drastically boost affordability and ultimately thaw out a frozen housing
market.
