Housing Is Actually Less Affordable Today Than In 2020-21
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Falling prices may be reeling buyers back into the housing market, but don’t let that fool you — homes are still far from affordable. 

Prices in many US housing markets have been falling over the past year, interest rates are going down, and buyers are starting to make purchases again. But is it really the right time to buy? A careful look at the cost of mortgages over the past couple years suggests that prices aren’t nearly as low as they could be, and that over the life of a mortgage, buyers are actually paying far more for their homes than they would have in 2021 when housing prices peaked. Two solutions are needed to address this affordability crisis: buyers need to fully leverage their negotiating power, and cities need to encourage new housing.

After taking his time combing the market, John finally found his dream home: a two-bedroom, two bath townhouse, close to his job, with enough space for his family, and good access to everything they need. John was hesitant to buy — prices were high and still rising — but on November 10th, 2021, he closed the deal. He bought the home for $400,000 on a 30 year fixed rate mortgage, with a 20% down payment, and a 2.98% interest rate. It was perfect: he only had to pay $1,346 a month on the mortgage.

But what if John had waited a year? National average interest rates on that type of mortgage were 7.08% in November 2022. If he had closed on the same home for the same price a year later, with 20% down, and a 30-year fixed rate mortgage, his mortgage payment would have been $2,146 per month: almost 60% higher. John might not have been able to afford his dream home if he had waited for prices to fall, and would have had to settle for something smaller and less convenient. John’s friend Carla did wait though, and price spikes forced her to put her dream of homeownership on hold.

But lately, Carla is seeing a lot of price cuts and hearing stories about how the market is starting to recover now that interest rates are going down. Now seems like the time to buy.

She starts shopping around and finds a home valued at $400,000. She has good credit, and enough money saved for a 20% downpayment, but the monthly payment is the big concern. Assuming she could get an interest rate close to the national average of 6% — twice as high as what John’s mortgage was in 2021 —  she would have to negotiate the price down by $95,000 if she wanted to have the same monthly mortgage payment as her friend. That’s a cut of almost 25% of the total price of the home.

No major city in the US has seen prices fall far enough to make a home in 2023 as affordable for homebuyers as it was in 2021. Even in areas where prices are still being cut, buyers need to be careful not to get caught up in the news and convinced to buy too quickly. Prices can and should be brought down further. Buyers need to leverage their negotiating power to pull them down as far as possible.

Of course, negotiating prices can only do so much. The FED has been doing its best to drive down prices by pushing up interest rates, but that only drives away buyers long enough to see the prices dip. As buyers rush back into the market, and demand recovers, prices will resume their rise. Things won’t be more affordable in the long-term without broader fixes to the market. 

For many of the regional housing markets in this country, the ultimate problem is limited supply. Up For Growth estimates that the current housing supply deficit is over 3.5 million units, with other estimates suggesting it could be as high as 20 million. We all know that if there aren’t enough eggs being produced, the price of eggs will go up: that same principle applies to housing.

Buyers can leverage their negotiating power to bring down prices, and we can hope that the FED will get inflation under control, and rates can fall. In the meantime, we need to build more housing. Municipalities need to do all they can to pave the way for developers: loosen density restrictions, shorten permitting times, and untangle the red tape, especially for affordable housing.

Until that happens, affordable housing will remain out of reach for most Americans. Of the buyers that can even afford to consider returning to the market now, buying a home, particularly in our strained coastal housing markets, is going to be an expensive project. Prices can go down further, and buyers should put pressure on both their governments and the market to see that they do.

Jeremiah Ludwig is an independent Housing Policy Researcher based in Washington DC, with four years of experience studying and researching US housing markets and policy.

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