While housing affordability has eased some, it remains a big sticking point for homebuyers, according to Morgan Stanley analysts.
Data gathered by the firm shows that the median monthly payment for a home is up more than $240 over the past 12 months — a 13% increase.
That marks the slowest pace of affordability deterioration since December 2021 and is more in line with previous periods.
“Any relief that lower mortgage rates were providing to affordability has largely been unwound,” James Egan, a strategist at Morgan Stanley, wrote in a note to clients with the firm’s housing research team. “In our view, the continued pressure on affordability prevents a significant increase in existing home sales volumes while keeping inventory tight, thus providing room for continued year-over-year growth in new home sales.”
Affordability conditions also have been largely unchanged over the past six months, the note said. Still, the recent run-up in mortgage rates in the last month has reversed those fortunes.
The average rate on the 30-year fixed mortgage surpassed 7% this week — hitting the highest level in more than two decades.
Rates have fluctuated since topping 7% in October and November of last year — the only other times to do so since April 2002. A slight dip came at the end of January, but over the past six and half months, rates have been on a choppy rise.
Higher costs of borrowing have weighed on inventory. Sales of existing homes are down 23% compared to the first half of 2022. Homeowners are reluctant to sell their home when they financed at a lower rate — pushing supply down and straining affordability.
“The lock-in effect continues to keep existing inventory near multi-decade lows, which in turn provides support to home prices,” Egan wrote.
“While we expect a third straight negative print in 2 weeks’ time – we forecast next month’s Case-Shiller print to be -0.2% year-over-year/+0.8% month over month – that might be the end of our brief foray into negative territory,” Egan wrote.
The mismatch between supply and demand has caught the attention of homebuilders. Housing starts for both new single- and multi-family units climbed to a seasonally adjusted annual rate of 1.452 million units, according to the Census Bureau data out Wednesday.
“Demand statistics were broadly softer this month. New home sales weakened slightly month over month but remain the strongest of the various demand statistics we track,” Egan wrote. Still, “as we stated last month, resilience in new home sales is not currently a sign of broader strength in housing demand.”
“While consumers’ attitudes toward buying homes is better than at its 40-year lows in November and December of last year, it has been largely stagnant for the last eight months.”