Why it’s So Expensive to Buy a Home Right Now

A diagram of a home rising in vvalue

Key Takeaways:

• For first-time buyers, this could be the worst housing market in recent American history.

• The combination of rising prices and quickly rising mortgage rates means fewer people will be able to afford a mortgage.

• If you’re waiting for a crash in the real estate market, it might not come.

The question is being asked repeatedly at kitchen tables and in the media: Is now a good time to buy a home? A recent survey by the Gallup polling organization suggests the answer is no.

A chart showing public sentiment over the housing market

Gallup says their data show there hasn’t been this kind of pessimism since the late 1970s.

Why are homes so expensive?

• Inventory is low, almost 50 percent below pre-Covid levels

• Prices have increased at double-digit rates, year over year

• Costs of construction have limited the number of homes built

• Interest rates are on the rise, and are at their highest since 2008

• Mortgage rates, at the time of this writing, are approaching 6%, after the biggest weekly spike since the mid 1980s happened this week

To make matters worse, The Census Bureau reported this week new home construction fell by over 14 percent in May. This is the largest drop since April 2021.

What’s a homebuyer to do? Hurry up and buy something as fast as possible, or take the sidelines and wait it out? With rising interest rates on mortgages, it's a tough question.

Consider just 1% rise in mortgage rates. It's a big deal, because it has an impact on your monthly payments. Look at the increases in the chart below.

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As for buyers who decide to ride this storm out, wondering if a crash is coming, most experts say it’s not going to happen. Because of mortgage rate hikes and the listing prices, the market is being forced to cool down because of decisions made by The Federal Reserve. It’s a balancing act; the Fed doesn’t want to cause a recession by making money too expensive, but it is trying to get a handle on inflation, currently at the highest level in 40 years. And they can do it, if they get a little lucky, and time the rate increases properly.

What’s your move?

For home buyers with less than perfect credit, or who are struggling to gather enough cash for a good down payment, millions of people are finding it’s not practical (or affordable) to try and purchase now. Those with large incomes, a low debt-to-income-ratio, and a strong credit profile are more easily able to absorb not only the bigger list price, but the larger monthly payments.

Or, let’s say you’re planning to start a family, or you have been relocated for your job. This added pressure makes waiting to purchase difficult. But experts tell us that when inflation is reined in, and the inventory of new and existing homes rises, prices will fall, and your options will increase.

Here’s a way to find out if inventory is rising or falling in your area. Divide the number of homes currently on the market by the number of homes sold in the previous month If the result is seven or above, that suggests inventory is strong. If your result is five or lower, it’s a seller’s market and supply is limited.

The story of the US housing market in 2022 has likely not been completely told. A lot of factors will determine the future. By watching both interest rates and inventory, you’ll know when the time is right for you.

John Scott

Unlock Technologies staff writer