Housing is becoming unaffordable: the us real estate market is running hot again

Housing is becoming unaffordable – the US real estate market is running hot again

Rapidly rising mortgage rates and high house prices are busting the budgets of more and more people who want to buy. Steps against inflation aggravate their situation.

Buyers outbid each other: sign in front of sold home in Woodcliff Lake, New Jersey

Buyers outbid each other: sign in front of house for sale in woodcliff lake, new jersey.

The american dream is about more than dishwashers and millionaires. For most americans, it consists of purchasing a home, the appreciation of which should secure a family's position in the middle class for generations to come. Only: the dream of wealth creation can no longer fulfill many these days. With mortgage rates and real estate prices skyrocketing at the same time, buyers in the U.S. Are having to dig deeper than ever into their pockets.

Many normal earners can forget about buying a home for the time being. Home prices and mortgage interest rates rose at the same time, the most in 40 years. The situation in the USA is thus similar to that in switzerland, but the problems on the US real estate market are much more serious – and in some cases bring back bad memories of the last real estate crisis, which culminated in the global financial crisis in 2007.

Prices and interest rates rise simultaneously

According to a report released tuesday by the national association of realtors, the median sales price of existing single-family homes reached $368,200 in the first quarter – up 15.7 percent from a year earlier. Meanwhile, the average interest rate for the popular 30-year mortgage, which was still 3.1 percent at the end of 2021, skyrocketed to the current 5.1 percent. A mortgage for ten years currently costs around 4.8 percent, which is twice as much as in switzerland.

So if you want to buy a house now, not only do you have to expect a much higher sale price, but you have to pay even more interest on the debt first. The result: the monthly mortgage interest burden for homebuyers was 39 percent higher at the end of april than a year earlier, according to real estate broker redfin.

The affordability of single-family homes is declining accordingly. In mid april, buyers had to pay 32.5 percent of their median income for mortgage interest. The ratio is almost as extreme as in the previous record year of 2006, when mortgage rates of around 6.75 percent meant home buyers had to fork out 34 percent of their income each month to pay for it.

Covid fuels property prices

If, in the coming months, interest rates rise 0.5 points and home prices go up 5 percent, affordability would be at an all-time low, according to black knight, a mortgage data provider.

Normally, high mortgage rates should depress property prices. This time, that mechanism doesn't seem to be working. The number of sales is slightly decreasing since the last few weeks, but most real estate experts expect that the prices of single-family homes nationwide will continue to rise until the end of the year.

The reasons for the special situation compared to earlier boom times have to do with covid-19. The pandemic is causing many people to flee the city, driving up demand for properties in distant suburbs. People are working from home more often and need more living space.

At the same time, covid is making it harder to meet higher demand: the construction industry is short of workers, and bottlenecks in the supply chains for building materials and household machinery are delaying the completion of new homes.

Too little housing for the millennials

The situation is exacerbated by two other basic facts: the numerically strong generation of millennials born around the turn of the millennium is entering the age of family formation, and far too few new homes have been built in the USA since the financial crisis of 2008.

Bloomberg illustrated the extreme circumstances this can lead to, using the example of california, a member state that has been particularly hard hit. So in april in berkeley, a 232-square-foot house built in 1953 was put up for bid for $1.795 million. It received 28 offers and eventually went to a cash buyer for $4 million. In hollywood, pop singer madonna wants to sell a property she bought from singer the weeknd for 19.3 million last year. The "material girl" now charges 26 million for it, 35 percent more.

Conversely, people like accountant armando villanueva and his wife who want to buy now no longer have a chance. They spent months looking for a bigger house for their future children in whittier, east of los angeles. As the "new york times" reports, late last year they stretched their budget further and further, finally offering $800,000 for a house with an advertised purchase price of $750,000. Someone else bid nearly a million dollars and won the contract. "We realized we had to wait and save up more cash," says villanueva.

Fed continues to drive up mortgage rates

However, at least in the medium term, the outlook is not favorable. Because it is not only house prices that are rising. The more people have to refrain from buying a house, the more demand for rental housing will grow. Accordingly, rents are now also rising. And higher rents turn the inflation screw.

In order to stem the galloping devaluation of money, the federal reserve on wednesday raised its key interest rate massively by 0.5 percentage points. If it wants to fight inflation, the central bank must raise interest rates, writes nobel prize economist and times columnist paul krugman. However, this will drive up mortgage rates further and make home purchases even more difficult, krugman complains. "The fed solves one pressing problem by exacerbating another, less pressing, but real problem."

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