The US housing market is on fire. Many factors are responsible for this situation including the pandemic, low inventory and strong buyer demand. Rising interest rates, inflated prices, and stringent monetary policy has contributed to the housing affordability crisis and tightened the housing market further. In fact, Miami surpassed New York to become the least affordable housing market in the country.
Although the housing problem in Miami was brewing for a long time, the rising gap between home prices and wages and the migration of out-of-state buyers and renters became the major driving factors. According to RealtyHop’s February affordability index, a household in Miami would have to spend more than 78% of its income toward homeownership costs.
Many economists believe housing affordability will continue to be a significant problem for realtors, homebuyers and renters in 2022 as builders are also struggling with ongoing building material production bottlenecks.
NAHB Chief Economist Robert Dietz said, “Building material costs are up 21% compared to a year ago.” “Their price and availability, along with persistent supply chain bottlenecks, remains the most urgent challenge for builders as they seek to boost production to meet rising demand,” he added.
Meanwhile, the inflation rate climbed to 7.5%, way above the 2% target. Rising construction costs combined with higher mortgage rates will create a challenging situation fueling the housing affordability crisis this year.
Russia-Ukraine Conflict: Will It Affect the Housing Affordability?
Another factor that might have a major impact on US housing affordability is geopolitical uncertainty. Russia’s invasion of Ukraine is casting its shadow on the world and can affect many industries, including real estate.
Although the Russia-Ukraine crisis gave temporary relief to home buyers, the rates surged again. The average rate on a 30-year mortgage was 3.89% on Feb 24 but later rose to 4.29% on March 3. The mortgage rates might continue to increase throughout the year. This short-term dip was because investors responded to the conflict by investing in safer options like bonds. The price of bonds is inversely proportional to interest rates, hence the fall.
The US economy is expected to be affected further because of the economic sanctions imposed on Russia by the US government and its allies. Since Russia is a major producer of oil and natural gas, gas prices may increase, directly impacting people’s finances.
People already struggling to afford a home will most likely get a significant blow on their wallets making it harder for them to gather enough cash for a down payment because of the rising prices of gas and other commodities. Middle-income households might be priced out of the market.
However, many mortgage experts and analysts believe that the rising geopolitical escalations between Russia and Ukraine will have a minor impact on US real estate. According to Jodi Hall, the President of Nationwide Mortgage Bankers (NMB), “the housing sector should expect to see less aggressive interest rate hikes in the wake of the Russian invasion of Ukraine.” Additionally, the Real Capital Analytics’ report stated that the global situation will have an indirect impact on commercial real estate because Russia is not an important player in the global commercial property market.
The Key Takeaway
The mix of soaring inflation, rising mortgage rates, surging material costs, and the Russia-Ukraine conflict might take housing affordability to historic lows. Many Americans might have to postpone their plans of buying their dream home due to multiple factors. Although at a slower pace, it’s no denial of the fact that home prices are rising while wages are stagnant. To be able to afford a home amid this situation, potential home buyers need to make more money or save a lot which looks like a far-fetched idea when the prices are climbing. Looking at the current scenario, it can be said that the housing affordability crisis might continue in 2022.