QUESTION
I read your article last week on selling mortgages when rates are high. At my company, we are stuck in a sales malaise because our borrowers are facing high housing prices. Newspapers are calling it the "affordability ceiling." Whatever you want to call it, our borrowers are holding back.
We can find workarounds for the rate, but there's nothing we can do about affordable housing.
In today's sales meeting, we passed your article around about the rate issue. Now, we could use some feedback on why it is so difficult to sell mortgages due to affordability issues. Please be straight with us. We need answers!
Why is affordability causing mortgage sales to slump?
SOLUTION
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ANSWER
Affordability
Let's start with an understanding of the word "affordability" in its common use. The current administration has been stating that it is a new media term invented by the political opposition. This misinformation has gone so far as to portray "affordability" as a "con job" or "hoax."[i]
The word "affordability" is not an invented media term. The Oxford English Dictionary shows this noun dates back more than a century to the 1910s. It is obviously derived from the verb "afford" and the suffix "-ability." While the word itself is old, its heavy saturation as a primary political buzzword surged significantly during recent election cycles to describe cost-of-living pressures.
For this article, I define "affordability" as the financial ability of people or households to pay for essential goods, services, or assets – such as housing, healthcare, or education – using their available income without going into severe debt or sacrificing other basic needs.
The way I see it, affordability relies on a balance between what things cost and how much money a person or family earns. It means a person has enough money left over for basic living needs after paying for a major necessity. From an underwriting perspective, using credit may make something temporarily accessible, but true long-term affordability depends on sustainable future income.
Affordability Ceiling
And, yes, there is an "affordability ceiling." This is an informal economic term that gained prominence in the early 2000s. I first saw it in market analyses involving real estate and also in financial journalism articles.
I would define the
“affordability ceiling” as the maximum price, rent, or cost that buyers and
renters can realistically afford based on their incomes. Once this limit is
reached, consumers can no longer absorb price hikes, forcing changes in market
behavior like downsizing or moving.
Now, let's go deeper into answering your question!
The Combination Punch
Home prices and mortgage rates are both staying high at the same time, and that combination is what's really squeezing buyers out of the market. That's quite a combination punch!
Unfortunately, there is a core math problem: The median single-family home hit an all-time high of $440,600 in July, up 1.8% from a year ago, with prices having risen for 36 straight months. Meanwhile, mortgage rates haven't come down much. By June, qualifying for a mortgage on the median-priced home required $109,152 in annual household income, up from $93,552 in January, a $15,600 jump in just five months.[ii] The fact is, wages simply haven't kept pace with that kind of increase.
Add to that the obstacle of rates rising alongside home prices. NAR calculates that in June, buyers needed to borrow at an effective rate of 6.57% (including points and fees), up from 6.19% five months earlier.[iii] Even modest rate upticks translate into real lost buying power. Indeed, one analysis found homebuyers lost about $11,000 in purchasing power between February and April alone, as rates moved from around 6% to 6.3%.[iv]
The result of this combo punch is a reduction in closings and an increase in contract fallouts. It takes a higher percentage of applications to land a single sale. The purchase pull-through rate recently dropped to 78.9%.[v] As to contract fallouts, roughly 14% of pending sales fell out of contract in July. This is happening because borrowers struggle to meet debt-to-income (DTI) requirements or back out due to payment shock.[vi]
