Housing affordability may decline starting this summer

March 23rd, 2015

Analysts expect housing affordability to decline for buying and renting after the Fed raises interest rates.

Housing affordability for home purchases and rentals could shrink as the Federal Reserve makes adjustments to monetary policy. This assertion came from National Association of Realtors (NAR) Chief Economist Lawrence Yun, who noted both rent prices and interest rates could soon noticeably outpace wage growth.

Yun’s statement accompanied the NAR’s existing-home sales report for February, which revealed both month-over-month and year-over-year improvement. However, these gains may slow as renting consumers have less to put aside for a home down payment as their monthly housing expenses increase. The projected change may be a sign prospective homebuyers should begin searching the market for a home now while conditions are affordable.

Wages are finally increasing but rent is skyrocketing
Sluggish wage growth has been a staple of the economic recovery. Despite an improving unemployment rate, earnings have not moved at similarly impressive rates to match rent prices.

The latest earnings report from the U.S. Bureau of Labor Statistics revealed 1.2 percent growth for average hourly earnings in January from December. Compared to the 0.1 percent month-over-month gain the previous month, January’s figure is a noticeable improvement. The wage increase at the start of 2015 was also notable when compared to most months in 2014, with each one seeing no more than a 0.4 percent gain with the exception of November 2014′s 0.7 percent improvement.

However, 2014 saw a $20.6 billion increase in overall rent spending. With the U.S. Census Bureau noting the rental vacancy rate declined throughout that year and more consumers renting to save up for a home, the expected continual rise in rent prices is fitting with current market conditions as landlords capitalize on demand.

Tight inventory fueling home price growth
When looking at declining affordability for buying a property, the issue stems from a tight supply of available homes.

“Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” Yun said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”

In February, inventory saw a gain month to month but fell compared to a year ago. The NAR previously predicted bidding wars will return as inventory continues to slide.

Affordable homes are out there
As with any housing market activity, conditions are mixed across the U.S. In fact, the NAR found 54 percent of homes in the country are affordable for consumers making the median income. This conclusion stemmed from an analysis of the NAR’s new and existing-home sale listings.

“So far this year, we are hearing from home shoppers that finding a home that meets their needs or budget is the biggest impediment to buying,” said Jonathan Smoke, Realtor.com chief economist. “If affordability is a challenge, this tight market favors activity in the heartland, where markets have a high number of affordable homes.”

The Midwest had many areas that were within reach for families with a median income. Illinois, Wisconsin, Missouri, Iowa and others have a large number of homes consumers can afford to purchase. On the other end of the spectrum, properties along the West Coast, in the Southwest, along parts of the East Coast and in most parts of Florida are unaffordable.

Analysts expect the Fed to raise interest rates by mid-2015, so consumers may have only a few months to cash in on historically low interest rates and score a deal in one of the aforementioned affordable areas. Although wage growth isn’t keeping pace with rent prices, consumers may be able to improve their financial standing – and savings for a down payment – by seeking more lucrative employment as the economy continues to add more jobs.