Americans’ ability to afford a typical home in 2023 deteriorated to its worst level in nearly 40 years, according to housing economists.
Only 15.5% of homes for sale last year were affordable for the typical US household, the lowest level since Redfin began tracking the data in 2013. That’s down from the typical level of 40% seen before the pandemic homebuying frenzy began and the 21% recorded in 2022.
By a separate measure, the housing market sunk to its least affordable clip since 1984, the latest data by Intercontinental Exchange, or ICE found.
"Homeowners are staying put instead of selling because they don’t want to lose their ultra-low interest rate," Redfin analysts wrote in the report. "That’s bolstering home prices because it means buyers are competing for a limited pool of homes."
The plunge in affordability was due in part to the shortage of listings, which fell 21% in 2023 — but also resulted from elevated home prices and climbing mortgage rates.
Though mortgage rates have been notching down from 23-year highs since November, that alone won’t resolve the challenges plaguing would-be buyers into the new year, experts warn.
"You can’t buy what’s not for sale," First American deputy chief economist Odeta Kushi said in a statement. "The good news is that mortgage rates have fallen further in December. Lower rates should drive an increase in activity."
A homeowner tours their new home, in Washingtonville, N.Y. (Credit: John Minchillo, AP Photo) ·ASSOCIATED PRESS
‘The least affordable year for homebuying’
Purchasing a home in markets that historically have been more affordable also became a challenge last year, as inventory of previously owned homes remained scarce.
In Kansas City, Mo., just 28% of homes for sale in 2023 were affordable for the typical household, down from 43% in 2022. That decline was the largest among the 100 metros Redfin analyzed. Next came Greenville, S.C., which saw affordable listings decline by 14 percentage points, followed by Worcester, Mass., Cincinnati, Ohio, and Little Rock, Ark. — all down nearly 14 percentage points.
Redfin defines an affordable listing as one where the monthly mortgage payment would be no more than 30% of the county’s median income.
The lack of affordability was largely due to the severe shortage of available homes for sale. Sellers who locked in a low mortgage rate before the pandemic were reluctant to list, leaving few options for would-be buyers.
"As you’re walking down the neighborhood, how many homes are listed for sale? It is only about half of what it was in 2017 or even 2019," Lawrence Yun, National Association of Realtors chief economist said. "Part of that is because existing home sales are at multiple year lows."
A sign is posted in front of new condominiums for sale in Los Angeles. (Credit: Mario Tama/Getty Images) ·Mario Tama via Getty Images
Overall, there were 352,500 affordable listings in 2023, down 41% from 596,135 the previous year, and a steep decline from over a million per year during the prior decade, Redfin found.
By contrast, metros that are known for being pricier didn’t see much of a decline in affordability — likely because anything in the affordable range has been bought up already.
For instance, in San Francisco, 0.3% of homes for sale in 2023 were affordable for the typical household — down from 0.4% in 2022, marking the smallest decline recorded by Redfin. Detroit, Los Angeles, Boise, Idaho, and Oakland, Calif. — already largely unaffordable — also saw minuscule change.
"Many of the factors that made 2023 the least affordable year for home buying on record are easing," said Elijah de la Campa, Redfin senior economist. "Mortgage rates are under 7% for the first time in months, home price growth is slowing as lower rates prompt more people to list their homes, and overall inflation continues to cool."
In October, mortgage rates climbed to the highest level in 23 years — pushing the average monthly payment on a US home up $144 to $2,500 for the first time since ICE began recording data.
That meant would-be buyers spent an average of almost 40% of median household income to make a principal and interest payment (P&I) on a typical home — highest since the Reagan era, according to ICE. On average, the P&I been less than 25% over the past 35 years.
The results were tangible: Purchase-mortgage applications plunged to 47% below pre-pandemic levels the week of Oct. 26 — the weakest since rates in all of 2023. Pending home sales also stalled for two consecutive months, as buyers remained stuck on the sidelines even as rates began to soften.
Rates for the popular 30-year fixed mortgage have since tumbled by more than a percentage point from their Oct. 25 peak of 7.79% to 6.62% in December. That’s $279 less per month needed to purchase a median-priced home compared to October, ICE noted.
But for buyers to feel any real relief from elevated home prices, more inventory needs to enter the market — and that won’t happen overnight.
For instance, in November there were 7.5% more newly listed homes compared to last year — breaking a 17-month streak of declines. Still, the median price of homes for sale remained elevated at an average $420,000, Realtor.com found.
Additionally, inventory of homes on the market was down 34% below pre-pandemic levels as of November — despite that uptick in listings. In all regions, the inventory of homes actively on the market for sale was down 25% to 55% from pre-pandemic levels.
And though some sellers may finally be lured back to the market this new year, bringing some more inventory to the market — inventory will still be rather tight.
Roughly two-thirds of outstanding mortgages have a rate under 4%, and more than 90% have a rate below 6%. That’s far below the 6.5% average expected for the 2024 calendar year, according to Realtor.com.
This will keep home prices from falling too much in 2024.
"Although mortgage rates are expected to ease throughout the course of the year, the continuation of high costs will mean that existing homeowners will have a very high threshold for deciding to move, with many choosing to stay in place," Realtor.com economist Danielle Hale wrote in her 2024 forecast. "Moves of necessity — for job changes, family situation changes, and downsizing to a more affordable market are likely to drive home sales in 2024."
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.
