Mortgage rates hit another record low, but homes are still less affordable

Mortgage rates fell to another record low this week, the eighth record set this year. But home affordability is weakening as the housing shortage, high demand from buyers and rising home prices negate the benefits of lower rates.

Only 59.6% of new and existing homes sold in the second quarter of this year were considered affordable to families earning an adjust median income of $72,900, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index. That’s down from 61.3% in the first quarter of 2020 and is the lowest reading in 18 months. NAHB did make an adjustment to median income estimates to account for the coronavirus pandemic.

The index based its calculations on the national median home price jumping to a record $300,000 from $280,000 and average mortgage rates falling 27 basis points.

The inventory of existing homes for sale at the end of June was down 18.2% annually, according to the National Association of Realtors, leaving just a four-month supply available. Supplies of newly built homes also fell 14.5% annually, according to the U.S. Census.

“The number of homes for sale has reached some of the lowest levels since online platforms began tracking inventory, leading to a frenzied environment of multiple bids, price escalation clauses and inspection waivers,” said George Ratiu, a senior economist at realtor.com.

While lower mortgage rates certainly give buyers more spending power, they also support higher home prices, and price gains reaccelerated in June after slowing in May, according to CoreLogic.

“Even with attractive rates and rising demand, banks have continued to tighten lending standards in July, further restricting available credit. At this pace, tighter lending standards and low inventory will squeeze housing activity and we will see a substantial slowdown in sales in the second half of this year,” added Ratiu.

Looking locally, the Scranton-Wilkes Barre-Hazleton, Pennsylvania, market was rated the nation’s most affordable major housing market, defined as a metro with a population of at least 500,000, in the NAHB index. More than 89% of new and existing homes sold in the second quarter were affordable to families earning that area’s median income of $66,600.

San Francisco-Redwood City-South San Francisco, California, was the nation’s least affordable major housing market. Just 8.5% of the homes sold there were affordable to families earning the area’s median income of $129,200.