Home Affordability Being Stressed By Higher Interest Rates, Higher Median Sale Prices And Higher Construction Costs
30-year mortgage rates reached a new high this week at 4.9%. A year ago, at this time 30-year rates were about 4%. A 1% increase rates makes owning a home less
affordable, especially for first time and first move up buyers. When you look at what that difference means a 1% increase would increase the monthly payment of a homebuyer purchasing a median priced house with 5% down by $155.00. In other cases, a potential buyer would have to come up with an additional $15,900 down payment to get to the same $1,250 payment level when rates were at 4%.
Although the median sale price declined 2.25% between August and September, despite the increase in interest rates, the year over year median sale price of homes in the Twin Cities increased by 7.4% to $262,000. A continuing trend of higher median sale prices and higher interest rates will make home affordability more difficult for homebuyers.
The number of closed sales decreased 5.26% between September of 2017 and September of 2018 and the number of pending sales has decreased by 1.4%during the same period. This decrease may be an early sign that the housing market may be starting to cool down returning to a more even balance between
sellers and buyers. The number of new listings has increased by 5.9% compared to a year ago. The number of homes available for sale was down slightly (4%) compared to last September with 12,623 homes available compared to 13,151 last year.
A Perspective on Interest Rates
By recent standards 30-year mortgage rates near 5% seem high. There has been almost a whole generation of younger homebuyers that have experienced an environment of very low interest rates (3% – 4%). While to these younger homebuyers a 5% rate may seem high, it was not that long ago that 5% -7% rates were considered normal. As can be seen in the chart below there have been periods in the past when rates have been much higher. If interest rates
continue to increase toward historical norms we will begin to see major adjustments in the housing market as higher rates impact affordability.
New Home Construction Prices
The gap between new construction prices and existing housing prices continues to widen. The adjoining table shows the national annual increase in sale price and price per square foot between 2015 and 2017. In the Twin Cities September, the median price of new homes sold was $397,383 compared to a median sale price of existing homes was $252,000. Since new homes tend to be
larger it is helpful to compare the price per square foot. The price per square foot for a new house sold in September was $175 per square foot as opposed to $139 per square foot for existing homes. Much of the cost increases for new construction have been driven by higher land costs, higher material costs and higher impac t fees. Building new housing that is affordable to homeowners in the low to median price brackets will continue to be a challenge tosupply the ever increasing need for affordable housing.
For more information, visit the Shenehon Center’s complete report for Sept ember 2018 at http://www.stthomas.edu/business/centers/shenehon/research/. The report is also available for free via email from Tousley at firstname.lastname@example.org