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Here's how far housing affordability has sunk this year

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Look how quickly affordability has deteriorated this year for first-time buyers: monthly mortgage payments are nearly 60% higher than they were in January.

At the start of the year, the down payment on a mid-priced home was $1,443 after a 10% drop. Now that’s $2,285, or $842 per month more, according to calculations Realtor.com provided exclusively to Yahoo Finance. The payment now consumes 30.2% of a shopper’s monthly household income, or nearly 50% more than in January, when it consumed just 20.3% of their income.

The story is the same for those who contributed a larger down payment, thanks to rapidly rising mortgage rates and soaring house prices. While these factors have eased in recent weeks – mortgage payments peaked in late October – affordability will likely remain a major challenge well into 2023.

“It will take time for the housing market to stabilize,” Danielle Hale, chief economist at Realtor.com, told Yahoo Finance. “Either mortgage rates need to come down a little bit, incomes need to go up, or prices need to correct a little bit to restore affordability back to something that would be more affordable.”

‘Buyers got sticker shock’

About a year ago, economists expected the average 30-year fixed mortgage rate to hit 4% this year. After starting at 3.22% in January, the rate hit 7% in early November, in what economists at Freddie Mac characterized as “the biggest year-to-date jump in over 50 years.”

In June alone, the rate soared from 5.23% to 5.78% in one week. The increase of more than half a point was the biggest one-week jump recorded since 1987.

“At one point, about 10 people backed out of plans to buy within two weeks just because of a change in rates,” Jason Sharon, owner and broker at Home Loans Inc., tells Yahoo Finance.

The unprecedented pace of interest rate hikes – driven by the Federal Reserve’s fight against inflation – has been the housing market’s Achilles’ heel. For homebuyers across the country, every percentage point increase eroded their purchasing power by tens of thousands of dollars.

Terri Straka stands on the porch of her new home as she finalizes details with a realtor in Myrtle Beach, South Carolina, on September 19, 2022. (Credit: Madeline Gray for The Washington Post via Getty Images)

Terri Straka stands on the porch of her new home as she finalizes details with a realtor in Myrtle Beach, South Carolina, on September 19, 2022. (Credit: Madeline Gray for The Washington Post via Getty Images)

“Affordability was $150,000 in the wrong direction,” Scott Sheldon, branch manager at New American Funding, told Yahoo Finance. “Someone who qualified for a $600,000 home in January can now only buy a home priced between $420,000 and $430,000… It has taken a significant hit to people’s bottom lines.”

So many buyers simply left the market.

Mortgage order volume for a purchase was 36% lower year-on-year in mid-December, according to the latest figures from the Mortgage Bankers Association, and demand is likely to remain subdued as buyers grapple with higher borrowing costs.

“Prospective buyers in 2022 have had a sticker shock,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told Yahoo Finance. “At the beginning of the year, they thought they knew what it would take to buy a house. So they went to the market, and because of the jump in rates, they found that the payout was much, much higher.”

‘The housing market of 2023 could be a nobody’s market’

As mortgage rates have risen this year, so have home prices, further crushing homebuyers’ budgets.

The median home price jumped from $369,900 in January to a peak of $449,000 in June — a 21% increase, according to Realtor.com. While home prices have since declined to $405,000 in December, that’s still nearly 10% more since January and out of reach for many buyers – especially with rates of 6.42%.

Only 42.2% of new and existing homes sold between July and September were affordable to families with an average income of $90,000, according to the National Association of Home Builders. That is the lowest tranche since the Great Recession.

“The market in general is starting to show signs that we can no longer afford 7% mortgages,” Sheldon said.

During an open house by real estate agent Prudential Tracy Do, interested buyers, realtors, and brokers make a steady stream of visitors in and around this 1920s California bungalow in Highland Park, which is listed for $379,000.  (Credit: Allen J. Schaben/Los Angeles Times via Getty Images)

During an open house by realtor Prudential Tracy Do, interested buyers, realtors, and brokers make a steady stream of visitors in and around this 1920s California bungalow in Highland Park, which is listed for $379,000. (Credit: Allen J. Schaben/Los Angeles Times via Getty Images)

If sellers don’t adjust their price expectations and mortgage rates stay below 7% next year, homebuyer affordability could remain at its worst level since 1985, economists at independent research firm Capital Economics said.

So far, though, it looks like sellers remaining in the market are getting the message.

The share of homes with price reductions rose to 19.6% in November from 9.2% a year earlier, data from Realtor.com showed. About 35% of builders also cut their listing prices in December, according to the NAHB, down slightly from 36% a month earlier.

“After being overwhelmed by the real estate frenzy of the recent past, homeowners, sellers, buyers and renters could be disappointed in 2023,” Hale said in a statement. “The housing market of 2023 could become a ‘no man’s market’, neither buyer nor seller friendly.”

Gabriella is a personal finance reporter for Yahoo Money. Follow her on Twitter @__gabriellacruz.

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