Why Housing Affordability Just Hit a 21-Year Low and What It Means for Orange County

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Federal Reserve Governor Michael Barr recently gave a blunt assessment of the housing market at a summit hosted by the Chicago Fed. His main point is that a serious housing shortage is pushing up shelter costs while the central bank may need to raise interest rates again. Wages and savings have not kept pace with rents and home prices, and that gap has been growing for years.

Affordability Is at a Two-Decade Low

Barr noted that an Atlanta Fed index of homeownership affordability, which compares home prices to incomes, reached its weakest level in 21 years this summer. That reading does not even account for higher mortgage rates. According to Freddie Mac, rates have climbed since spring and topped 7% last Thursday.

Barr said high prices and high rates together put homeownership "out of reach for many families." Real home prices adjusted for quality are at record highs in many parts of the country. For Orange County shoppers, this is not news, but it shows the pressure is national.

Why Homes Cost So Much

Barr listed several causes. Restrictive zoning and regulation limit new construction, productivity in homebuilding has stagnated, and builders spent years building too little after the subprime crisis. Construction materials have also become more expensive.

Realtor.com research puts the national housing supply gap at more than 4 million homes. Senior economist Jake Krimmel agreed with Barr's read on affordability and pointed out that land use and zoning sit upstream of nearly every other housing problem.

The Lock-In Effect Keeps Owners in Place

Barr also referenced research from Realtor.com economists on the lock-in effect. Roughly half of all mortgages carry rates of 4% or lower, and close to 80% are under 6%. Owners with those loans have little reason to sell and trade up to a much higher rate.

The result is fewer listings. In tight markets, that reduced supply can push prices up more than the smaller pool of buyers pushes them down. On top of higher prices and rates, buyers are also facing bigger insurance premiums and property tax bills.

More Fed Rate Hikes May Be Coming

Last week, Fed officials unanimously voted to raise the benchmark rate by a quarter point because inflation has stayed stubborn. It was the first increase in three years. Barr supported the move, saying the Fed had been out of position, and he expects more adjustments will be needed to bring inflation back to target.

The next Fed meeting is in late October, and markets currently see about a 70% chance of another hike, based on CME FedWatch. The Fed does not set mortgage rates directly, but its policy and investor expectations about inflation strongly influence them. Mortgage rates have been rising since early March, when the war with Iran sent oil prices surging.

Smart Moves for Buyers in This Market

Nobody can say exactly where rates will peak. Still, Realtor.com research found that mortgage rates stay within a half-point range over a three-month stretch almost 80% of the time. That gives buyers some help in planning.

Krimmel offers a useful tip: focus on asking prices, not just rates. Negotiating a lower purchase price can often outweigh the cost of higher financing. Sellers, meanwhile, benefit from the scarcity of listings, but pricing realistically for today's stretched buyers is essential.

Bottomline

The headlines may sound intimidating, but every market has opportunity for buyers and sellers who have the right guidance. If you are thinking about a move to Orange County, I would love to help you sort through the numbers, negotiate with confidence and find a home that fits your goals and your budget. Reach out to me at Whitestone Real Estate, and let's build a plan that works no matter which way rates go.