It’s unlikely that the cost of purchasing a home will return to a normal level of affordability anytime soon.
To buy the typical U.S. home at today’s mortgage rates, the median household would need to spend 30.2% of their income on monthly payments, according to a recent report from Zillow, which describes the affordability outlook for mortgages as “bleak.”
The amount the median household would have to spend on mortgage payments is 7.4 percentage points higher than the average from 2005 to 2021 of 22.8%.
For affordability to return to the average level from that period, home values would need to fall by 24.7% — assuming mortgage rates are 6.5%.
A decline that large would be a return to where home values were in fall 2020. It would mean a drop of roughly $88,000 in the value of the typical home, from $358,283 (the typical value in September 2022) down to $269,686, according to Zillow.
While some experts think home prices will decline in the months ahead as high mortgage rates price buyers out of the market, even the more pessimistic housing forecasts don't predict prices going that low.
"The next several years appear set up for affordability to be a major challenge for home buyers," Nicole Bachaud, senior economist at Zillow, said in a release.
Will buying a home become affordable again?
In some markets, home values are much closer to historical affordability norms than the average gap nationwide.
In Baltimore, home values would only need to decline by 3.7% to reach the historical norm. The declines needed for homes to be affordable in Chicago (9.6%) and Philadelphia (10.1%) are also much smaller than the national average. On the other extreme, however, prices would need to decline the most in Miami (32.6%), Tampa (36.1%) and Dallas (38.3%) in order to be in line with historical affordability norms.
Home affordability has worsened in U.S. markets in the past year as mortgage rates have soared, largely because the Federal Reserve has raised interest rates five times to try to slow inflation. The typical monthly mortgage payment is 55% higher now than it was at the beginning of 2022, according to Zillow.
As a result, the housing market has become much less active. Fewer buyers are bidding on homes because it’s more expensive to borrow for a home purchase. This phenomenon is typically associated with downward pressure on home prices.
Because home prices and mortgage rates are so high right now, many buyers will need to reduce their expectations when it comes to the type of house they can purchase, Zillow reports. For obvious reasons, some buyers are shifting their search to smaller homes.
There are some notable signs that the housing market is cooling. Home prices have declined in the past three months, according to the National Association of Realtors (NAR). More than one in five homes up for sale had a price drop last month, a record rate since Redfin began keeping track in 2012.
But the median sales price is still up more than 8.4% in the past year, according to the NAR. Homeowners are reluctant to list their homes on the market right now because most owners are paying mortgage rates well below what they are today.
The relatively small number of homes for sale has kept prices from declining more. According to Zillow, the inventory of homes on the market is nearly 40% lower than it was before the pandemic.
Zillow economists forecast home values will stay basically flat in the next year. Some housing economists are more bearish, projecting that prices will decline.
But in this market slowdown, most experts do not expect prices to drop by the 25% figure that would be needed for homes to become affordable again.