"We're witnessing the biggest collapse of homebuyer demand in US history"
The US housing market is in the midst of a downturn, with mortgage applications plunging to historic lows and home affordability reaching critical levels, president and CEO of First American Properties Michael Eisenga noted.
“We’re witnessing the biggest collapse of homebuyer demand in US history,” said Eisenga in a recent analysis. Mortgage applications have dropped by 63% since their pandemic peak, a figure that surpasses the declines seen during the 2008 financial crisis. Compared to pre-pandemic levels, applications remain down by 52%.
The “crisis” has been attributed to the combination of high home prices and elevated mortgage rates. During the pandemic, low mortgage rates spurred demand, pushing prices higher. However, in today’s market, those same homes have become unaffordable for many potential buyers. A home purchased for $400,000 in 2019 with a 3.5% interest rate resulted in a monthly mortgage payment of $1,796. That same home today, priced at $500,000 with a 7.26% mortgage rate, would cost $3,416 per month—an increase of $1,600 that many households cannot afford.
Eisenga highlighted that while mortgage rates around 7% are not historically abnormal, they are now compounded by home prices that are 80% above long-term averages. This results in the highest inflation-adjusted housing costs seen in 134 years. Even during the 2008 housing crisis, price levels were not as extreme as they are today.
Affordability gap widens
The affordability crisis is deepening, with the income required to purchase a median-priced home now standing at $114,900 annually—far above the median household income of $74,000.
Additionally, the “golden handcuff” effect has led to a stagnation in housing inventory. Many homeowners who secured low-interest mortgages in previous years are hesitant to sell, as doing so would mean taking on significantly higher mortgage rates.
While inventory has risen to over 1.15 million homes, Eisenga has warned that this does not necessarily indicate a healthy market. Nearly half of US states are experiencing price declines, with home values dropping faster than they did before the 2008 financial crisis. Without substantial price reductions, many buyers remain sidelined, unable to afford homeownership.
A long road to recovery
The outlook for affordability remains bleak, with Eisenga noting that meaningful improvements will require both lower interest rates and a correction in home prices. However, with interest rates not declining at the necessary pace and wages growing only modestly, it may take years for incomes to catch up with current price levels.
Luxury housing markets, particularly in high-cost coastal areas, are showing signs of weakness. High-end properties are staying on the market longer and experiencing multiple price reductions—an early indicator of a broader market slowdown.
Demographic shifts may also play a role in future market dynamics. As Baby Boomers age and downsize, a greater supply of large homes could enter the market, potentially influencing price trends.
Despite these challenges, Eisenga remains optimistic about the future of the housing market. “Housing markets are cyclical, and while the short-term outlook is bleak, conditions will eventually improve,” he said. He advises prospective buyers to remain patient and monitor market trends closely, as price corrections could present future opportunities. “These downturns usually play out over a three-to-five-year period. So be patient, and you will be rewarded,” he noted.
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