Americans are still clamoring for homes despite soaring prices, and they’re forking over more of their paychecks on mortgages than they have since the last housing bubble.
Mortgage rates are on the rise as the Federal Reserve raises interest rates in hopes of cooling demand throughout the economy. Yet the US housing market is still running white-hot, leaving buyers with an even higher barrier to entry.
The typical household is now spending 31% of its income on mortgage payments, according to new data from Black Knight, a mortgage technology and data provider. That’s the largest share since 2007 and up from 24% at the end of last year.
The surge in the mortgage payment-to-income ratio underscores the problem facing prospective US homebuyers. House prices ballooned throughout the pandemic as record-low mortgage rates and intense demand fueled a historic home shortage. Various housing-market indicators flashed the hottest readings since the bubble of the late 2000s, and fears of another crash quickly emerged.
Some signs suggest the market is starting to cool. Housing starts unexpectedly climbed in March to the fastest rate since 2006, signaling contractors are rushing to meet demand.
The surge in mortgage rates — one of the fastest in history — is also expected to ease the buying spree. The average rate on a 30-year fixed mortgage rose to 5.11% in the week that ended Thursday, according to Freddie Mac, up from 3.11% at the end of last year. Higher rates mean costlier borrowing, and the uptick should curb some of the buying that relied on the low rates seen throughout the pandemic.
It may be some time, however, before rising rates cut into demand. The Black Knight data suggests shoppers are willing to dig deeper into their pockets despite the higher rates, and prioritize home-buying over waiting for the market to normalize.
Although this has led many Americans to draw comparisons to the housing bubble of the mid-2000s, there are clear signs the US isn’t repeating history — and they mostly have to do with the fact that today’s homebuyers are in a far better financial position.
“This is not the same market of 2008,” Odeta Kushi, First American’s deputy chief economist, previously told Insider. “It’s no secret the housing market played a central role in the Great Recession, but this market is just fundamentally different in so many ways.”
While today’s market irregularities are rooted in a great imbalance between supply and demand, the housing bubble that provoked the 2008 crisis was caused by an explosion in often dubious mortgage financing.
During the mid-2000s, a combination of exploitative lending practices, cheap debt, and complex financial engineering contributed to millions of borrowers being placed into mortgages they could not afford. When these borrowers defaulted on their loans, it triggered a foreclosure crisis in the housing market and a credit crisis among the investors who owned bonds backed by their defaulted mortgages, which also birthed the worst financial crisis in modern history.
In 2022, lending standards have tightened and the subprime loans that powered the 2008 crash aren’t nearly as rampant today. Buyers also have more purchasing power, as median household wealth has increased by more than 48% since 2006.
This growth helps explain why home buyers — regardless of historically high home prices and rapidly rising mortgage rates— are still duking it out for the limited amount of homes available for sale.
As Black Knight’s data signals buyers aren’t calling it quits in the immediate future, there may be little hope the demand side of the market will cool anytime soon.
This article was written by Ben Winck, Alcynna Lloyd, Madison Hoff from Business Insider and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.