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Housing Affordability Is About to Get Worse As Mortgage Rate Impact Lags

by Joshua Garcia

Housing Affordability to Worsen Due to Delayed Impact of Mortgage Rates

According to Morgan Stanley, the lagging effects of higher mortgage rates will lead to even worse housing affordability in the coming months. The bank’s co-heads of US securities products research highlighted this issue in a recent podcast. They explained that it takes approximately seven weeks to complete a mortgage closing, which means that the recent spike in mortgage rates will take time to materialize in actual home purchases.

In addition to the time it takes to close a mortgage, housing data like the Case-Shiller Home Price index are released with a two-month delay. This means that deals closed in October, based on mortgage rates from August, may not be reflected in data reports until December. As a result, the impact of higher mortgage rates on the housing market will be delayed and may not be fully evident until later this year.

Mortgage rates play a significant role in housing affordability, along with home prices and homebuyer incomes. While the housing market has been increasingly unaffordable, it had not been deteriorating significantly this year. However, the latest spike in mortgage rates has changed that.

Morgan Stanley’s Jim Egan stated, “Affordability is still very challenged and now it’s started to get worse again.” He further explained that the monthly payment on a median-priced home has increased by 18% over the past year, marking the first acceleration in deterioration since October 2022.

Moreover, the tight supply in the housing market is expected to drive home prices higher. Morgan Stanley predicts that the Case-Shiller index will rise by 0.7% year over year in the next report, reaching a new record high.

For the remainder of the year, the bank has a base case scenario of flat home prices and a bull case scenario of a 5% increase. However, Egan highlighted that the current trends, including limited housing supply, suggest that prices may lean towards the higher end of their projections.

Other experts in the field also believe that affordability will not improve until mortgage rates decrease more substantially, which may not happen in the near future. The markets anticipate that the Federal Reserve will maintain elevated interest rates as they monitor inflation, which would likely keep mortgage rates elevated as well.

In conclusion, housing affordability is expected to worsen due to the delayed impact of higher mortgage rates. As the housing market continues to face challenges, it is crucial to closely monitor the trends in mortgage rates, home prices, and homebuyer incomes to gauge the overall health of the real estate market.

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