Lower mortgage rates are making homes more affordable, but challenges remain
Falling mortgage rates have improved home affordability to its best level since February, according to a new report from Intercontinental Exchange (ICE).
Lower rates are also boosting refinance opportunities for many recent mortgage holders, bringing relief to prospective buyers who have been struggling with affordability amid rising home prices.
With 30-year conforming mortgage rates dropping by 60 basis points from May's 7% peak, the average-priced home now comes with a $145 lower monthly payment compared to three months ago. However, the share of income needed to make these payments still sits at 34.3%, which is 10 percentage points above the 30-year average.
“Recent easing in mortgage rates brought some much-needed relief to prospective homebuyers,” said Andy Walden, VP of research and analysis at ICE. He noted that while home price growth is cooling, and rates below 6.5% made August the most affordable month for housing since February, affordability remains a challenge.
“But August’s improvement is certainly welcome progress,” Walden added.
Though demand for purchase loans saw two of its best weeks since March, activity remained notably lower than the levels seen earlier in 2023 when rates were comparable, which “may well turn out to be a good thing on balance.”
“Purchase demand perked up on August’s rate drops, hinting at a population of prospective homebuyers poised and ready to act as soon as market movements tip the affordability math in their favor,” Walden said.
The ICE Home Price Index for July 2024 showed the annual rate of home price growth slowing to 3.6%, down from 4.1% in June, marking the slowest pace in 12 months.
“The market today is in a good position from the perspective of the Fed and its mission,” Walden noted. “Slower home growth is a positive sign in the Fed’s fight against inflation and increased – but still mild – demand is good for the market and Fed alike. And of course, in some slightly good news for homebuyers, affordability has improved measurably from recent historic peaks.”
While prices ticked up 0.19% nationally from June, they fell by 0.25% or more across Florida’s nine largest metro areas, with Cape Coral seeing a 1% decline. Other Florida cities, such as North Port and Jacksonville, also posted notable price drops.
In contrast, the Midwest and Northeast regions are experiencing persistent inventory shortages, which continue to push prices higher. Cleveland, Providence, Richmond, and Chicago were among the top performers in terms of home price growth in July.
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“However, recent inventory gains come much more from softer demand than from an increased willingness among homeowners to list their homes for sale,” said Walden. “This makes supply – and its follow-on effect on home prices – sensitive to rate changes, making demand worth watching closely.
“Without a meaningful return in new listing volumes, the market is reliant on weak demand to allow inventory to grow, limiting the prospect of stronger sales activity without a corresponding risk of inventory drawdowns.”
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