Here's how much housing affordability tanked this year

Here’s how quickly affordability deteriorated this year for first-time buyers: Their monthly mortgage payment is nearly 60% higher than in January.

At the start of the year, the payment on a median-priced home was $1,443 after putting 10% down. Now it’s $2,285, or $842 per month more, according to calculations Realtor.com exclusively provided Yahoo Finance. The payment now eats up 30.2% of a buyer’s monthly household income, or nearly 50% more than in January when it took up just 20.3% of their income.

The story is the same for those who contributed a larger down payment, thanks to rapidly rising mortgage rates and elevated home prices. While those factors have tempered some in recent weeks — mortgage payments peaked in late October — affordability will likely remain a top challenge into 2023.

“It’s going to take time before the housing market stabilizes,” Danielle Hale, Realtor.com’s chief economist, told Yahoo Finance. “Either mortgage rates have to soften a bit, incomes have to increase, or prices have to correct a bit to restore affordability back to something that would be more accessible.”

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‘Buyers had sticker shock’

About a year ago, economists expected the average rate on the 30-year fixed mortgage to top out at 4% this year. After starting at 3.22% in January, the rate crested 7% in early November, in what Freddie Mac economists characterized as “the largest year-to-date jump in over 50 years.”

In June alone, the rate spiked from 5.23% to 5.78% in one week. The more than half-point increase was the biggest single-week jump recorded since 1987.

“At one point I had roughly 10 people withdraw from purchase plans within two weeks just because of a change in rates,” Jason Sharon, owner and broker at Home Loans Inc., told Yahoo Finance.

The unprecedented pace of rate hikes — driven by the Federal Reserve’s fight on inflation — was the housing market’s Achilles heel. For homebuyers across the country, each percentage point increase eroded their purchasing power by tens of thousands of dollars.

Terri Straka stands on the porch of her new home while she finalizes details with a real estate agent in Myrtle Beach, South Carolina on September 19, 2022.  (Credit: Madeline Gray for The Washington Post via Getty Images)
Terri Straka stands on the porch of her new home while she finalizes details with a real estate agent in Myrtle Beach, South Carolina on September 19, 2022. (Credit: Madeline Gray for The Washington Post via Getty Images)

“Affordability has gone $150,000 in the wrong direction,” Scott Sheldon, branch manager at New American Funding, told Yahoo Finance. “Someone who was qualified for a $600,000 house in January can now only purchase a home priced between $420,000 and $430,000 ... It’s been a significant blow to people’s bottom line.”

So, many buyers simply left the market.

The volume of mortgage applications for a purchase was 36% lower year over year in mid-December, according to the latest figures from the Mortgage Bankers Association, and demand will likely remain low as buyers navigate higher costs of borrowing.

“Potential buyers in 2022 had sticker shock,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told Yahoo Finance. “At the beginning of the year, they thought they knew what it would take to buy a home. Then they went into the market and, because of the jump in rates, they found out the payment was much, much higher.”

‘The 2023 housing market could be be a nobody’s market’

As mortgage rates increased this year, so did housing prices, crushing homebuyers’ budgets further.

The median home listing price jumped from $369,900 in January to a peak of $449,000 in June — an increase of 21%, according to Realtor.com. Though home prices have softened since then to $405,000 in December, that’s still almost 10% more since January and out of reach for many buyers — especially with rates at 6.42%.

Just 42.2% of new and existing homes sold between July and September were affordable to households earning a median income of $90,000, according to the National Association of Homebuilders. That's the lowest share since the Great Recession.

“The overall market is starting to show signs that we can't really support 7% mortgages anymore,” Sheldon said.

During an open house by Prudential Realtor Tracy Do, interested buyers, realtors and brokers make a steady stream of visitors in and around this 1920's California Bungalow in the Highland Park which is listed for $379,000. (Credit: Allen J. Schaben/Los Angeles Times via Getty Images)
During an open house by Prudential Realtor Tracy Do, interested buyers, realtors and brokers make a steady stream of visitors in and around this 1920's California Bungalow in the Highland Park which is listed for $379,000. (Credit: Allen J. Schaben/Los Angeles Times via Getty Images)

If sellers don’t adjust their pricing expectations, and mortgage rates don’t budge from 7% next year, homebuyer affordability could remain at its worst level since 1985, economists from independent research firm Capital Economics said.

So far, though, it appears the sellers who remain in the market are getting the message.

The share of homes with a price reduction increased to 19.6% in November, up from 9.2% a year earlier, data from Realtor.com showed. Some 35% of builders also cut their listing prices in December, according to the NAHB, slightly down from 36% the previous month.

“After being overwhelmed in the housing frenzy of the recent past, homeowners, sellers, buyers and renters may be underwhelmed in 2023,” Hale said in a statement. “The 2023 housing market could become a ‘nobody’s-market,’ not friendly to buyers nor sellers.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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