It’s so expensive to buy a home now that something needs to be done about it, but an economist says that won’t happen any time soon.
Even though buyers aren’t buying homes, prices keep going up to new all-time highs. The cost of getting money is still high because mortgage rates are still high. The main reason most people don’t buy homes is that they are too expensive.
Chen Zhao, the economics research lead at Redfin RDFN -1.72%, told BourseWatch that’s a sign of a market that’s not healthy and needs a price adjustment.
People who want to move should be able to do so in a healthy rental market, Zhao said.
For that to happen, she thought home prices would have to drop by as much as $121,000 to make living again affordable. She also said that wasn’t likely to happen soon: There are about 383k homes for sale right now.
In the past five years, the U.S. home market has changed a lot. During the pandemic, it was very busy with lots of buying and selling, but by 2023, it had slowed down to a crawl. Loan rates of 8% made people less likely to buy, and sales hit a 29-year low.
Prices have been steadily going up, but people are still not buying homes. Case-Shiller, a measure of home prices, set a new record high in July for the 14th month in a row. This is despite the fact that home prices are rising much more slowly now.
A long-lasting lock-in effect is a big reason why the home market is in such bad shape. Most people who still owe money on their mortgages have interest rates that are lower than the current 6% rate. Many homeowners don’t want to move because giving up that for a higher rate would mean a higher mortgage payment.
How much home prices need to drop
Most of the time, how much of a family’s income goes toward housing costs like rent or mortgage payments is used to figure out how affordable housing is. People who rent or own their own homes and spend more than 30% of their income on living are said to be cost burdened.
Zhao calculated that a typical family spending $383,000 on a home would have to spend about 41% of their income on housing. This is because of how much a home costs compared to the average family’s salary. Assuming a 30-year mortgage rate of 6.08%, that’s about $2,500 a month just in mortgage payments.
Zhao found that home prices would have to drop by 28% for them to be more affordable. This is because mortgage rates are currently at 6%. That’s about $121,000 less than before.
Zhao said, though, that won’t happen any time soon. She also said that a fix of that size probably won’t happen soon because there aren’t many homes for sale and there are a lot of people who want to buy homes.
It’s more possible that home prices will rise less quickly over time while incomes rise faster, giving people more money to spend. She also said that this could bring the ratio of house payments to income closer to what it has been in the past.
Places where house prices don’t match up
In fact, home prices have started to drop a lot in some places in Texas and Florida where the number of homes for sale has gone up. Intercontinental Exchange found that home prices dropped the most in Cape Coral, Florida, in July.
Next, other groups have looked for big cities in the U.S. where home prices might start to rise again. Based on long-term price trends, one study by Florida Atlantic University found that following Atlanta, Ga., and Las Vegas, Nev., Detroit, Mich., is one of the most overpriced areas in the country.
CoreLogic, a company that analyzes real estate data, found that home prices could fall the most in the Atlanta-Sandy Springs-Roswell metropolitan area, as well as in the Utah cities of Provo-Orem and Salt Lake City.
