Saving money to buy a house? Your dollar is worth half what it was at the end of 2020, new data shows

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A tough market for home buyers is getting tougher as the combination of rising prices and rising mortgage rates makes it even harder to afford a home, new data shows.

Despite these challenges, people are still buying homes. About 4 million are sold every month. But to a surprising extent, rising mortgage rates and a shortage of homes for sale (fueling rising prices and bidding wars) have weakened their financial position.

Today, people borrow much more money to buy homes at much higher interest rates than just a few years ago. Overall, a homebuyer’s dollar is worth about half what it was at the end of 2020.

In December 2020, mortgage rates hit some of their lowest levels ever, with a 30-year fixed rate available at 2.68%. This is a sharp drop compared to 3.78% the previous year.

Today, government-backed lender Fannie Mae says the average interest rate on a 30-year fixed-rate mortgage is 7.63%.

And prices have also skyrocketed. The median sales price for a single-family home is above $416,000 in the second quarter of this year, up from just under $360,000 at the end of 2020.

By some measures, US housing price indices are at all-time highs.

Lawrence Yun, chief economist at the National Association of Realtors, says that at the end of 2020, the monthly mortgage payment on a typical newly sold home was about $1,100 in principal and interest. Now it’s about double that.

The NAR estimates that a buyer today needs to earn $107,232 a year to afford that median home. That calculation is based on recent rates for a buyer who makes a 20% down payment and spends 25% of their gross monthly income on housing expenses.

This is somewhat conservative, as many people spend more than 25% of their budget on these costs. And home prices vary widely across the U.S. But it still shows how difficult it is becoming to afford a home and feel financially secure.

The actual median household income was $74,580 in 2022, according to the US Census Bureau.

“If you don’t make six figures, it’s going to be really difficult” to afford a home in many markets, Yun told NBC News.

Discovering affordability

Another way to measure change: NAR also publishes a monthly housing affordability index. A typical reading, Yun says, is 120, meaning a person with a median income has enough money to buy a home that’s about 20% above the median price.

That figure has fallen from almost 170 pre-Covid to a preliminary total of 91.7 in August. This is the lowest reading since October 1985.

According to Yun, part of the problem stems from the 2006-2008 housing crisis, which started the Great Recession and the global financial crisis. Many smaller homebuilders failed, surviving builders became more conservative and, combined with rising regulatory costs, that has depressed construction for an entire decade.

That’s one of the reasons there are fewer homes for sale than usual. Another is that, in many cases, people who already own their homes and pay mortgage rates in the 3% to 4% range don’t want to sell or buy a new home at nearly 8%.

The difference between a monthly mortgage payment of 3% and one of 8% can be staggering. For a median-priced home costing $416,000 with a 20% down payment, your monthly mortgage at 3% interest is $1,403. At 8% interest it is $2,441.

Many people are excluded from the real estate market, which has also made rent more expensive. But there is at least some good news, according to Yun.

“Fortunately, at least when it comes to rent, they are building apartments in many cities,” Yun said.

He adds that there are also some positive signs for homebuilders. The stock prices of companies like Toll Brothers and NVR (the parent company of Ryan Homes, NVHomes and Heartland Homes) have soared in the last year, meaning investors want to give these companies cash they can use to build more houses. That alone won’t solve the affordability problem, but it would probably help.

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