The housing affordability crisis is set to worsen due to the delayed impact of mortgage rates, according to a podcast by Morgan Stanley. The bank’s research team highlighted that it typically takes around seven weeks to close a mortgage, meaning that the recent spike in mortgage rates will take time to reflect in home purchases. Additionally, housing data, such as the Case-Shiller Home Price index, is released with a two-month delay, further delaying the visibility of the impact of mortgage rate increases.
Mortgage rates play a significant role in determining housing affordability, along with home prices and homebuyer incomes. While the housing market has already been struggling with affordability, the situation is deteriorating further. According to Jim Egan, a representative from Morgan Stanley, the monthly payment on the median priced home has increased by 18% over the past year, marking the first time this deterioration has accelerated since October 2022.
With housing supply remaining tight, home prices are expected to continue rising. Morgan Stanley predicts that the Case-Shiller index will increase by 0.7% year over year, reaching a new record high. The bank has a base case of flat home prices for the end of the year, with a bull case of a 5% increase.
Experts suggest that affordability is unlikely to improve until mortgage rates decrease significantly, which may not happen in the near future. The market expects the Federal Reserve to keep interest rates elevated as they monitor inflation, which will likely influence mortgage rates to remain high.
It is essential to address the housing affordability crisis as it poses challenges for prospective homebuyers. Stricter affordability measures and policies are necessary to ensure that housing remains accessible to a wider population. Additionally, increasing housing supply can help alleviate the pressure on prices and improve affordability.