Housing affordability deteriorating at fastest pace in 25 years

U.S. housing affordability is at its worst level in decades and is only expected to deteriorate further over the course of the year.

Continue Reading Below

In the first quarter of 2018, affordability worsened by 5% as the cost of having a mortgage rose, according to a report from Arch Mortgage Insurance. The picture is only going to get worse through the remainder of the year, which is headed for the fastest annual affordability deterioration in 25 years. Monthly mortgage payments are expected to increase by another 10% to 15%. In cities including Los Angeles, that jump could be as high as 20%, Arch said.

The cities where affordability is expected to deteriorate at the fastest rates are Tacoma, Wash., Fresno, Calif., Baltimore; and Boston.

The national housing outlook shows few signs of improving.

“A strong U.S. economy combined with a housing shortage in many markets means that there is little hope of any price drop for buyers,” Ralph G. DeFranco, global chief economist of mortgage services at Arch Capital Services, said in a press release. “Whether someone is looking to upgrade or purchase their first home, the window to buy before rates jump again is probably closing fast.” The National Association of Home Builders predicts there will be fewer than 900,000 new home starts this year even though the market could absorb 1.2 million to 1.3 million, indicating another year of underbuilding. A lack of qualified construction workers and strict regulation are among the factors contributing to the lack of new inventory.

Meanwhile, the U.S. economy is slowly picking up steam, the labor market is improving and the demographic outlook is progressing.

As a result of these trends, home prices are now higher than they were at the peak of the housing boom. The National Association of Realtors and Freddie Mac estimate that median price growth will accelerate by 3.5% in 2018 and in some cases will rise faster than income gains over the coming years.

While obstacles mount for first-time home buyers, there is some good news for established homeowners. The probability of home values declining are “unusually low,” at 5%, according to Arch. Residents in North Dakota, Wyoming, West Virginia and Alaska are at the highest risk of seeing their home values depreciate.