Home sales in the U.S. remain weak, with total sales in January reaching 4.7 million—only modestly above the levels seen in the aftermath of the Great Recession between 2008 and 2010, according to a recent research note from Wells Fargo economists.
The Housing Market’s Affordability Crisis
This time around, it’s because would-be buyers can’t afford the one-two punch of high home prices and high mortgage rates, and sellers can’t afford to lose their low rates,” Fortune reported.
The total sales figure before the pandemic hovered around 6 million, surging even higher during the housing boom. However, affordability remains the biggest hurdle.
The tepid pace of home sales can not be blamed on a recession,” Wells Fargo economists wrote. “Rather, the main factor weighing on residential activity continues to be adverse affordability conditions. In addition to high mortgage rates, home prices continue to rise.
Mortgage Rates and Home Prices Remain Elevated
While home prices are no longer experiencing double-digit increases and mortgage rates have eased slightly, affordability remains a major issue. “Since February 2020, home prices have increased 45%, and the average 30-year fixed mortgage rate is 6.67%; in Feb. 2020, mortgage rates were 3%,” Fortune noted.
Wells Fargo senior economist Charlie Dougherty told Fortune that “a meaningful improvement in the adverse affordability conditions which persist currently seems unlikely given the elevated rate environment and structural shortfall of available homes keeping home prices on an upward trajectory.”
The Lock-In Effect and the Housing Shortfall
The lock-in effect, where homeowners hold onto properties due to their low mortgage rates, has further constrained inventory. “The interest rate lock-in is behind the recessionary low levels of existing home sales, which account for the lion’s share of total home sales,” Moody’s housing economist Matt Walsh told Fortune.
Walsh also emphasized the affordability crisis, saying, “The average monthly principal and interest payment on a home has more than doubled in the last five years.”
Moody’s housing affordability index, which tracks how well a typical middle-income family can afford a median-priced home, is at its lowest level since the 1980s.
Home Sales to Remain Weak for Years
Wells Fargo and Moody’s both forecast only modest improvements in home sales over the coming years.
Given affordability will remain extremely unfavorable for most buyers, the pace of home sales is expected to remain weak and not far from the low levels hit in the aftermath of the financial crisis,” Dougherty said.
Other experts have drawn parallels between the current housing slowdown and the Great Recession, despite key differences in economic conditions. “The economy might be booming but housing has fallen into a recession,” Redfin CEO Glenn Kelman told Fortune.
Housing analyst Ivy Zelman, known for her early warnings about the previous housing crash, previously stated that existing home sales were likely at their lowest levels since the Great Financial Crisis.
JPMorgan senior markets economist Joe Sedyl also noted that “sales of existing homes are very depressed, as bad as after the global financial crisis
