Analyst Note| Brian Bernard, CFA, CPA |
Inflation-adjusted home prices eclipsed mid-2000's levels in 2021 as housing demand surged amid a tight supply of homes for sale. Still, homeownership affordability (measured by the median mortgage/income ratio) remained favorable, in our view, due to record low mortgage rates (the 30-year fixed rate mortgage averaged about 3% in 2021). However, affordability has since eroded due to the 30-year rate increasing 200 basis points since end-2021 (to over 5% in late April) and a continued uptick in home prices. We had been expecting a more gradual increase in mortgage rates. There's a recent precedent of slowing housing demand amid sharply increasing mortgage rates. In late 2018, home sales slowed considerably as the average 30-year fixed rate rose about 100 basis points to 5% in less than a year. However, the slowdown was short-lived as mortgage rates quickly moderated. We don't expect mortgage rates to quickly reverse course this time though.