Will We Ever See a Normal Home Buying Market Again?

The housing market has been “hot.” In the US, buyers are bidding upwards of 40% on down payments to have hope for a chance at purchasing a home; in other areas, houses are going unsold. 

Housing Inventory

According to this report, done by Arch Mortgage, housing inventory is low, which means that more people want to buy a house than there are houses available to purchase. Mortgage rates are starting to rise from their record lows, but buyers are still flocking to a very competitive housing market. 

So when will inventory become available, and when will housing become more affordable again? To answer those questions, there are two factors to look into:

  1. The Media DTI
  2. The year 2018

Median DTI

A Median DTI refers to the median, or midpoint, of the debt-to-income (DTI) ratio. A DTI refers to the ratio of all of your monthly debt payments divided by a person’s gross monthly income. 

The market depends on the Median DTI for a couple of reasons. If median home prices grow faster than incomes and interest rates increase, it could mean a return to affordability. 

For the 2021 housing market prices to return to more affordable numbers, two things need to happen:

  1. Interest rates need to reach about 3.4%
  2. Home prices need to grow 2% more than income growth. 

For this to work, home prices and incomes should grow at the same rate. 

Why look at 2018?

2018 marked the last time rising interest rates helped the housing market return to affordability. In Q4 of 2017, Freddie Mac, a company that works with mortgage lenders,  averaged a 30-year fixed rate of 3.92%, rising to 4.78% by Q4 of 2018.

This increase in the 30-year fixed-rate increased the Median DTI from 29% to 31.5%. 

How does this affect 2021?

Affordability decreases as the Median DTI increases. When this happens, some potential buyers are turned off, which then thins the number of buyers, making sales drop. When sales decline, the number of houses listed can grow as fewer buyers take them off the market.

When this happens, then a return to lower, long-term average levels of affordability and a slow movement towards a more balanced supply and demand. 

When will the housing market become more affordable?

Analysts predict that housing prices will continue to rise into 2022, meaning no expected housing market crashes for this year or next year. However, it’s essential to keep track of your local market so you can find the best time to buy for you. 

Initially reported here on HousingWire.com.