Jon Johnson File Photo/Gila Herald
The property market might be in real trouble. Many experts expected house prices to drop this year as interest rates went up, but for a long time prices continued to soar. However, prices have now dropped for the third month in a row and this trend is likely to continue for a while.
In theory, this should provide much-needed relief for a society in the grips of an affordable housing crisis. The average American cannot afford the size of the mortgage they would need to buy a new home. Lower house prices should counteract this.
But the same factors that are causing house prices to drop are making it more difficult for Americans to afford a home. Getting a mortgage goes beyond just having a high enough credit score. There are a number of external considerations, starting with those high-interest rates.
When applying for a mortgage, the size of the loan itself does not determine how affordable it is. Rather, it is necessary to look at how much you will pay each month for the next thirty years. The end figure depends on a number of factors, including the size of the down payment. However, the most significant external factor is the mortgage rate.
At the start of the pandemic, interest rates were brought down to historic lows. This led to the availability of incredibly low mortgage rates. These rates were a huge factor in the uptick in demand for housing. People who could not have afforded a mortgage before could now expect to pay far less even for expensive homes. This demand remained in the face of skyrocketing prices.
In 2022, the Federal Reserve has been regularly hiking the interest rate in an attempt to stop rampant inflation. These rate hikes have led to equivalent hikes in mortgage rates. Suddenly, we are at a point where homes require larger mortgages than ever and mortgages are extremely expensive.
Because of these high mortgage rates, demand for houses has dropped, leading to the price correction we are seeing. But as long as these mortgage rates remain high, buying a home will remain prohibitively expensive.
This is not the only factor making it tougher for the average American to buy a home.
Not only will the mortgage be expensive, but ownership of a home itself will drain a buyer’s budget. This is not because of high property taxes but because construction is extremely expensive at the moment. Supply chain issues caused by the pandemic and exacerbated by Russia’s invasion of Ukraine mean that equipment and materials are in high demand. There is a huge backlog and any sort of construction work is pricey.
Every homeowner knows how much maintenance is required just to stay in place. In normal times, homeowners are told to expect to spend 1% of the value of their home on maintenance every single year. High construction prices in 2022 mean that 1% is extremely optimistic. Even if you take the DIY route rather than hiring a contractor, the materials will still likely cost you more than ever before.
Utilities are also expensive, with shortages of natural energies leading to high prices. The bigger the home is, the more you are going to spend monthly just to keep the lights on.
The bad news is that there is no guarantee things will ever go back to the old idea of normal. The good news is that a correction is a likely scenario. An eventual end to the conflict in Europe will see supplies improve and energy prices drop. As inflation drops, so will interest rates. Concurrently, housing prices will continue to go down.
Whether it happens a few months or a couple of years from now, homes are likely to once again become affordable. A mortgage may not be as cheap as it was at the height of the pandemic, but normalcy is a good thing. We can hope to return to the status quo sooner rather than later.
In the meantime, many people will have to choose to continue renting rather than pursue their homeownership dream. While rent is also expensive, it comes without the need for a big down payment and constant maintenance work. You can also save money by renting a smaller place with lower utility bills.
Renting may not be your ultimate ambition, but it is not a bad choice for now. If you use this time to save money to buy a home, you can create the perfect conditions for homeownership.