T
he US housing market has been described as "a nightmare" due to record-high home prices, elevated mortgage rates, and a shortage of homes for sale. However, recent signs suggest the market may be trending in a positive direction: home-price growth is slowing, and mortgage rates are starting to fall.
According to Redfin Senior Economist Asad Khan, stability in home prices could be enough to bring housing costs back to normal levels without a crash. Buyers shouldn't expect affordability to improve overnight, but trend lines indicate real progress within this decade if mortgage rates decline modestly and price and income growth hold steady.
The concept of "normal" is subjective and varies by region. For the purpose of this analysis, July 2018 was chosen as the baseline, when mortgage rates were around 4%, home prices were rising but manageable, and the national median monthly mortgage payment-to-income ratio was 30%. This benchmark is widely recognized for housing affordability.
However, "normal" doesn't necessarily mean affordable. In July 2018, San Francisco's monthly mortgage payment-to-income ratio was 74%, while it was just 18% in St. Louis. The analysis measures how far each market would need to move to return to its own 2018 affordability level.
Possible paths and timelines for housing costs returning to normal levels are:
* If mortgage rates fall to 5.5%, home prices grow at current rates, and household income grows at 3.9% annually, housing costs will return to normal by November 2030.
* If mortgage rates remain at 6.7%, home prices stay flat year over year, and household income grows at 3.9% annually, housing costs will return to normal by September 2031.
In most major metros, it will take longer for housing costs to return to "normal." However, some areas like San Francisco have already returned to normal levels due to high household income growth and stabilized home prices.
Sixteen of the top 50 US metro areas are expected to return to normal housing costs within five years if mortgage rates fall to 5.5% and home prices continue growing at current rates. These metros include San Francisco, Oakland, Austin, Denver, Seattle, and Los Angeles.
If home prices remain flat year over year and mortgage rates are 5.5%, all but two of the top 50 US metros will return to normal housing costs within ten years. If rates remain at 6.7%, 38 metros will return to normal.
Redfin Senior Economist Khan notes that high household income growth and low (or negative) home price growth are key conditions for metros to return to normal housing costs.
