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House poor is back: ‘the new normal for the foreseeable future’

by Joshua Garcia

As mortgage rates continue to rise, monthly payments for homeowners have skyrocketed, making it increasingly difficult for many to afford their homes. According to real estate data and analytics firm Black Knight, monthly mortgage payments have increased by 60% in the past year, with some homeowners now paying $3,000 or more each month.

The surging mortgage rates are a result of the current 30-year fixed-rate mortgage reaching 7.18%, a significant difference from the sub-3% rates seen during the early days of the pandemic. This has led to higher monthly payments for new buyers, with the average monthly principal and interest payment on a 30-year fixed-rate loan reaching over $2,300, the highest average on record.

These increasing monthly payments have raised concerns about affordability, especially when considering the average monthly earnings in July 2023, which were just $4,600 according to economic data firm CEIC. This means that some homeowners could be spending more than 60% of their paychecks solely on their mortgage payments, before factoring in other expenses like property taxes and insurance.

The situation has raised questions about when and why a $2,000 monthly mortgage payment became the norm. Andy Walden, Vice President of Enterprise Research at Black Knight, highlights the stark increase in homeowners paying over $3,000 per month, which has risen from just 5% in 2021 to almost one in four July homebuyers. This puts a spotlight on the worsening affordability crisis.

For first-time homebuyers, these higher monthly payments can be particularly challenging. With a median renter’s monthly household income of $3,900, a $2,000 principal and interest payment would represent 51% of their monthly budget, making affordability a significant hurdle.

Buck Horne, Director of Equity Research, Homebuilding and Residential REITs at Fortune 500 investment banking firm Raymond James, warns that paying more than 40% of monthly income towards housing is unsustainable, especially considering the long-term average, which is closer to 30%. The combination of higher rates and continued price appreciation has made affordability a real challenge for first-time homebuyers.

However, there are some factors that keep buyers in the market, such as families providing financial support for down payments and buyers using home equity from existing home sales to offset the cost of a new mortgage. Despite these factors, with mortgage rate increases by the Federal Reserve and the unpredictability of the market, it is unclear when prospective homeowners will find relief.

While it is uncertain when things will change, rising mortgage rates combined with tight housing inventory and pent-up demand are likely to impose challenges on new buyers for the foreseeable future. Any relief in mortgage rates may be absorbed by even higher home prices, making the current level of mortgage payments the new normal unless there is a fundamental shift in the larger economy that disrupts household balance sheets.

In conclusion, the increase in mortgage rates has significantly impacted homeowners’ monthly payments, making it increasingly difficult for many to afford their homes. Affordability is at an all-time low, especially for first-time homebuyers, and the current level of mortgage payments may become the new norm until there is a significant change in the market.

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