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February 25, 2021

Affordability Concerns on the Horizon

Affordability is about consumer buying power (wages) and housing prices. They are both rising but are not in step. Fortunately, a bigger trend, housing inventory, is dampening the negative impact of high prices.

Housing affordability concerns are on the horizon. What can we expect in 2021?

When a housing market is this hot, you can count on people starting to bet on what will lead to a correction or mark the turning of the home financing cycle. Will it be rising interest rates? A rise in defaults? Lack of liquidity? Lack of inventory? 

For some, the most likely culprit of a near future downturn in the market is home price affordability. But are affordability concerns on the horizon significant enough to impact the market? 

How much will consumers pay? 

There are two primary components to housing affordability, consumer wages and home prices. Housing prices can rise and not impact affordability as long as consumer wage growth keeps pace. That’s not what we’re seeing in the market today. 

At year’s end, we received the latest report on the S&P CoreLogic Case-Shiller home price index and learned that it rose 8.4% year-over-year in October. The uptick the industry saw from the previous month (September) was 7.0%, the largest increase since March 2014

At the same time, researchers at the Brookings Report show that wages for the typical worker have increased about 1% per year over the past three decades. That’s hardly keeping up. 

What the future will hold? 

It will take more than numbers like these to diminish the industry’s optimism. Recently, Danielle Hale, chief economist for said she expects home sales to grow 7% this year, even though she expects prices to rise another 5.7% above 2020’s high levels. 

On the mortgage side, loan volume estimates are significantly lower than what we expect 2020 to finally end up showing. Even so, we’re still looking at a great year for mortgage lenders with $2.72 trillion in mortgage business up for grabs. 

Low inventory is having a dampening effect on the potential negative implications of low affordability. With about half a million homes on the market, according to ATTOM, competition among those consumers who have the means to buy will be enough to keep home prices rising, at least for now. 

That could change if more homes come onto the market, thanks to COVID. I’ve written about that before and now with 500,000 COVID-related deaths, we may have more real estate hitting the market, which could change the entire equation. 

However, none of these trends will change the fact that the business is hot now and every lender needs to serve as many borrowers as possible while they are in the buy zone. To talk about the technology you’re currently using to take full advantage of today’s opportunity, visit with us today. 

By Joe Camerieri, EVP, Client Account Management at Mortgage Cadence

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