Housing affordability has declined dramatically in 2022 due to continued rising home prices and a three-percentage point jump in mortgage rates. Based on the popularity of Google searches for "housing bust" or "housing bubble", it could be surmised that buyers are anticipating relief, but they are probably not going to see it anytime soon.

Home price appreciation is moderating and is down from the 20% level experienced in 2021. Some of the major industry prognosticators are estimating anywhere from 9% to 14% for 2022. Interest rates are expected to continue to rise through the end of 2022 and could be at 7%. Freddie Mac 30-year fixed-rate mortgage was 6.66% on October 6, 2022.

Even though homes currently for sale increased to 3.2 months in August 2022, it isn’t that much more than it was for the same month in 2021 when it was at 2.6 months. Most markets are still entrenched in favor of sellers because a balanced market between buyer’s and seller’s is at six month’s supply.

While buyers may be feeling that a new home is no longer affordable, there are several affordability indexes that provide a baseline for objective measurement. The National Association of REALTORS� produces a monthly index. Affordability is determined by indicating a median income person/family can afford to purchase a median priced home with a 20% down payment based on a 25% qualifying ratio for monthly housing expense to gross monthly income.

The index is structured so that a value of 100 indicates that a family with the median income has exactly enough income to qualify for a mortgage on a median priced home. When the index is above 100, the family has more than enough to qualify.

The NAR Housing Affordability Index for 2019, 2020, and 2021 was 159.7, 169.9 and 152 respectively. It was 143.1 in January and by April had decreased to 108.1 and the preliminary number for June is 98.5. The decrease in the index is directly affected by rising interest rates and home prices outpacing family income.

Home sales were seasonally adjusted in August to be 4.8 million which is down .4% from the previous month and down 19.9% from August 2021. Lower sales are partly a function of a smaller pool of eligible buyers and concerns about a variety of economic conditions.

This may not sound like good news for buyers whether they are labeled first-time or move-up, but it is an objective view of the market. It has become more expensive to buy a home now and will continue to increase in the future.

Getting into a house using whatever devices are necessary can at least put the momentum on your side. Homes are appreciating faster than inflation and the fact that leverage improves the growth rate due to using borrowed funds to buy the home is also to the buyer’s advantage.

So, getting back to the original question "when will the market turn to make homes more affordable?" It may not be a dramatic change but more likely, a subtle one. Prices will moderate by still appreciating but not as much as in 2021. Inventories will increase slightly but won’t affect price because the low supply has been almost a decade in the making and it will take time to reach balance in the market.

Mortgage rates are not as low as they were, but they never were before in the history of the U.S. Millions of people had mortgages in the 1980’s that were as high as 18.5%. Buyers financed the homes at the going market rate, sometimes with creative financing, and refinanced the properties later when the rates came down and the values had gone up.

Real estate is still a great hedge against inflation, and many times, the largest and best investment individuals have. The Federal Reserve Survey of Consumer Finances found that homeowner’s net worth is 41 times greater than renters.

The rapid rise in mortgage rates during 2022 coupled with continued appreciation of home prices have limited the number of buyers in the market which is reflected by the lower number of home sales currently. "It’s a fact that many households are impacted by higher mortgage rates as they no longer earn the qualifying income for the median-priced home." Nadia Evangelou, NAR Economist

One of the things that agents are doing to help buyers lower their house payments is to suggest an adjustable-rate mortgage. The rates on these types of loans are tied to indexes that reflect the current market rates and produce less risk for the lender. The payments adjust on the anniversary date based on the index plus margin named in the note.

While many people think that they only adjust upward, they also adjust downward when the index indicates it. For the week of September 29, 2022, the Freddie Mac 5/1 ARM was 5.03% compared to the 30-year fixed-rate of 6.70%.

Another tool that experienced agents are using to address affordability issues are interest rate buydowns. In recent years, there have not been many buydowns used because interest rates were already very low, but now, more people are considering them again.

A buydown is prepaying the interest on a mortgage at the time of closing to lower the payment for a specific period or for the term of the mortgage. Obviously, it would be more expensive to buydown the rate for the whole term of the mortgage.

Either the seller or the buyer can buydown the rate and it would be specified in the sales contract. From a practical perspective, sellers in the recent past haven’t had to consider this option because of the high demand and multiple offers that were commonplace. Now that sales have slowed, and both inventory and market time is increasing, some sellers want to make their homes more marketable and are seeking a competitive advantage.

A common temporary buydown is called a 2/1 which reduces the payment in the first two years of the loan by calculating the borrower’s payment at 2% less than the note rate for the first year and 1% less than the note rate for the second year. Years three through thirty, the payment would be the normal payment at the note rate.

A buydown is a fixed rate, conforming mortgage that the borrower must qualify at the note rate to indicate that borrowers will be able to afford the mortgage after the first two years of lower payments.

As an example, on a $400,000 sales price with a 90% mortgage at 5.54% interest for 30-years, the normal principal and interest payment would be $2,053.08. By using a 2/1 buydown, the payment for the first year would be at 3.54% interest, 2% lower than the note rate, making the payment $1,624.61. The second year, it would be at 4.54% interest, 1% lower than the note rate, making the payment $1,823.63.

The buyers’ payment would be $428.47 lower each month for the first year and $220.45 a month lower for the second year. The total savings would be $7,787.04 which becomes the cost of the 2/1 buydown. This amount must be paid at the time of closing by either the seller or the buyer.

The most prevalent providers of buydowns in the past have been builders. It is a concession like paying closing costs or upgrades for the buyer. As sales have started to slow, some builders in particular price ranges and areas are currently considering this benefit to close more sales.

To summarize: a buydown is a fixed-rate mortgage where the interest is pre-paid for a period to help the borrower with lower payments for a time. A 2/1 buydown allows the buyer to have significantly lower payments in the first two years which will give them time to settle into the house while they can be confident of what the payment will be in years three through thirty.

The pre-paid interest is deductible for the buyer, even if the seller pays for it. This is something that the buyer will want to talk about with their tax advisor when they are doing their income tax for that year.

If you are selling a home, talk to your listing agent about this option to increase marketability. If you are a buyer, discuss this as an affordability option. If your agent isn’t familiar with buydowns, ask them to research it with a trusted mortgage officer. Buydowns are legal and have been available for decades. The determining factor may be whether the market has softened enough that sellers are willing to consider them.