High prices of homes and elevated mortgage rates have pushed out hopeful buyers in the United States, but housing affordability could improve if several criteria are met.
That is according to TD economist Shernette McLeod, who recently predicted that national affordability could return by mid-2027. McLeod defined affordability as a household's ability to spend no more than 25% of its income on monthly housing costs. However, this can only happen if three conditions are met, she wrote.
Mortgage Rates Should Fall
To improve US housing affordability, McLeod said mortgage rates must first decline to between 5% and 5.5%.
As of the week ending Aug. 29, the contract rate for the 30-year mortgage fell to 6.35% while the rate for the 15-year term declined to 5.51%, according to data from Freddie Mac. These rates slid from a peak of 8% in October.
Mortgage rates are expected to drop further, especially if the Federal Reserve makes its anticipated cut during its next meeting on Sept. 18. It is unclear how much rates would fall following a Fed cut, but forecasts from experts such as Fannie Mae expect mortgage rates to fall to 5.90% in the fourth quarter of 2025.
Home Prices Need To Grow
Apart from falling mortgage rates, McLeod said home prices should increase by 3%. As of July, the median US home price was $438,706. A 3% increase means home prices should reach $451,867 by 2025 and $479,385 by 2027.
Analysts at Fitch Ratings currently predict home price appreciation to reach 5% by the end of the year. In the first quarter of this year, home prices increased by 1.5%.
Average Income Needs To Increase
Lastly, McLeod said the average household income would also need to grow by 4.5% yearly to make housing more affordable. As of the fourth quarter of 2023, the average wage in the US was $59,384 per year, per the Bureau of Labor Statistics (BLS).
Can Housing Affordability Improve in 2024?
With homebuyers currently struggling to purchase properties, McLeod said there are ways to immediately improve housing affordability. This includes a 300-basis point decline in mortgage rates, a 20% drop in home prices, or a 25% increase in average wage.
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