Housing affordability 'is the worst it's ever been,' analysts say

·4 min read

Homebuyers are facing the worst affordability conditions, according to two analysts who expect the housing market will get harder to break into this year.

"Affordability from a home price/down payment perspective is the worst it's ever been, meaning extreme barriers to entry," according to a BofA Global Research note by BofA Securities U.S. Economist Alexander Lin and BofA Securities U.S. and Global Economist Jeseo Park.

Still, “consumers remain steadfast in their interest to buy, but are uncertain," the analysts wrote.

Three big themes emerged in the report. Higher mortgage rates are here to stay. It’s still better to own than rent if you can afford the down payment. And, supply chain problems continue to fuel constraints on inventory.

A sold banner is displayed over a For Sale sign in front of a house in Washington, DC, on March 14, 2022. (Photo by Stefani Reynolds / AFP) (Photo by STEFANI REYNOLDS/AFP via Getty Images)
A sold banner is displayed over a For Sale sign in front of a house in Washington, DC, on March 14, 2022. (Photo by STEFANI REYNOLDS/AFP via Getty Images)

Higher rates are the new normal

“The pickup in mortgage rates this year has been fast and furious,” the analysts wrote, noting the 30-year fixed mortgage rate averaged 4.22% in March — up from the December average of 3.26%, citing Wall Street Journal data. “The massive rates move this year suggests that the affordability index will see another significant move lower.”

Higher rates will also hurt inventory because existing homeowners — who make up about 40% of home sales — may be reluctant to sell because they feel the so-called “lock-in” effect.

“There is greater disincentive to move and replace their current mortgagee that likely has a lower fixed rate,” the analysts wrote, “lowering housing turnover.”

‘No painless decision between buying or renting

HOUSTON, TEXAS - FEBRUARY 07: A 'For Rent' sign is posted near a home on February 07, 2022 in Houston, Texas. Since March 2020, the estimated median rent of new leases has increased by double digits in several Texas cities. The increase in sales prices has made it more difficult for people to buy a home, as a result increasing the number of people looking to rent. (Photo by Brandon Bell/Getty Images)
A 'For Rent' sign is posted near a home on February 07, 2022 in Houston, Texas. Since March 2020, the estimated median rent of new leases has increased by double digits in several Texas cities. The increase in sales prices has made it more difficult for people to buy a home, as a result increasing the number of people looking to rent. (Photo by Brandon Bell/Getty Images)

As home prices have skyrocketed, so have rents, the analysts noted, which increased almost 15% year over year in January, per Zillow.

“Given housing costs are rising broadly, the question many households face is which is less painful: to buy or to rent?” the analysts wrote.

By the slimmest of margins, it’s better to buy than rent — and here’s the major caveat — if you can afford the “historically high down payment.”

“The ratio is less than one, suggesting it is better to buy than rent [but] this ratio does not account for property taxes or other expenses tied to homeownership,” the report said.

Homeowners spend $15,405 annually on top of their mortgage for costs associated with homeowners insurance, property taxes, maintenance and repairs, improvements, and utilities, according to research by Clever Real Estate. Nearly two-thirds of millennials who regretted their home purchase last year cited maintenance cost as a top factor, according to a study by Bankrate.

The rent/buy calculation is also local, the analysts noted. For instance, renting in San Francisco or San Jose is “the far lesser of two evils” with mortgage payment there taking up 45% of the median family income versus only above-25% for median rents. In Miami, it’s flipped. It’s still more affordable to buy — relatively — than to rent.

“Unfortunately for Americans, there really is no painless decision between buying or renting,” the analysts wrote.

Supply chain issues constrain inventory

NEWARK, CALIFORNIA - DECEMBER 15: A worker makes repairs to a home under construction at the Lennar Bridgeway home development on December 15, 2021 in Newark, California. Homebuilder Lennar will report fourth quarter earnings today after the closing bell. (Photo by Justin Sullivan/Getty Images)
A worker makes repairs to a home under construction at the Lennar Bridgeway home development on December 15, 2021 in Newark, California. Homebuilder Lennar will report fourth quarter earnings today after the closing bell. (Photo by Justin Sullivan/Getty Images)

Even before the Russia-Ukraine crisis, the housing market was constrained with supply chain issues.

“One of the biggest challenges in the housing market has been dwindling supply, which has reached new record lows,” the analysts wrote.

Even before the pandemic, builders were constrained by finding new lots, labor, and lumber. The subsequent pandemic-related supply chain woes have only extended build timelines, and “the Russia-Ukraine conflict threatens to add further hiccups, with materials prices being pushed higher,” the analysts wrote.

“Given these extraordinary supply challenges, we expect home prices to stay hot at a 10% [year-over-year] clip in 2022 despite existing home sales pulling back.”

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Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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