If real estate professionals are starting to see more apprehension among buyers in their respective markets, it’s not without reason. According to recent data released by Zillow, buyer demand has retracted in recent months in response to the record-low affordability in the market.
As mortgage costs rise alongside skyrocketing prices and interest rates, Zillow’s most recent market report shows that mortgages have hit affordability lows not seen since at least 2007. Mortgage rates surged in early June, averaging 5.78%, which translates into a monthly mortgage payment of $2,127 for a new purchase of a typical U.S. home.
According to Zillow experts, that’s 51% higher than a year ago and up 36% year to date. As incomes lag further behind rising mortgage costs, the report indicates that the buyers are faced with the “most significant affordability challenges in the past 15 years.”
- Mortgage payments are higher than rent in 45 of the 50 largest U.S. metros, up from 22 in 2019.
- Price appreciation is finally starting to slow, easing slightly from 20.9% annual growth in April to 20.7% in May.
- Typical rents are up to $1,979 in the U.S. and still rising with 1.2% monthly growth.
- The typical U.S. home is now worth $349,816—up nearly $60,000 annually and almost $95,000 from May 2020.
- The number of for-sale listings that went under contract in May is down nearly 20% from 2021
- Inventory continues to recover from February lows but is still 50% below 2019 levels.
- Share of listings with a price cut rose to 11.5% in May from a recent low of 8.5% in February.
The major takeaway:
Based on Zillow’s report, experts have noted that the homeowners are using roughly 28% of their monthly income to pay their housing costs, which is nearing the threshold (30%) of becoming a “cost burden.”
The affordability strain has gradually started to weigh down buyers to the point where demand has begun to retract in the market, which has been most evident in the consistent decline in existing home and pending home sales that have taken place in the 2022 housing market.
“Mortgage rates took an unprecedented leap skyward over the past two weeks and quickly multiplied housing costs as they rose,” said Zillow economist Nicole Bachaud. “We are already seeing signs of waning demand and expect these recent rate hikes to quicken the market’s needed rebalancing. While shoppers will likely experience less competition for homes than the frenzied recent months, their purchasing power has dwindled.”
Despite a surge in rents nationwide, experts state that renting is still cheaper across 45 of 50 large metro areas compared to the rising mortgage cost. A typical rent payment in May is more expensive than a mortgage with a 20% down payment in just five of the 50 largest U.S. metros—down from 28 markets in May 2019.
After annual price appreciation set new record highs for 13 straight months, home values finally turned the corner in May to show a slightly slower pace of annual growth: 20.7%, down from 20.9% in April.
“Arriving in the middle of the spring selling season, this deceleration is a clear signal that buyers are dialing back their demand for homes in the face of daunting affordability challenges,” said Jeff Tucker, senior economist at Zillow.