According to the Census Bureau, food and retail services increased by 0.7% in March compared to the previous month and 4% year-on-year. Industrial production increased by 0.4%, with manufacturing activity rising by 0.5% after a 1.2% upward revision over the prior month, reaching its highest level in 11 months. Mining output decreased by 1.4%, while utility output increased by 2.1%. Federal Reserve Chairman Jerome Powell recently stated that interest rate cuts won't appear soon. 'Right now, given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work,' Powell said.
This week, the average rate for a 30-year fixed mortgage reached 7.50%, marking the highest of the year. Meanwhile, housing prices continue to rise, with the median home sales price increasing by 5% year-on-year to $393,500 as of April 14.
According to the National Association of Realtors (NAR), existing home sales fell by 4.3% in March, with a seasonally adjusted annual rate (SAAR) of 4.19 million, only half the growth in February. NAR Chief Economist Lawrence Yun stated in a press release that home sales stagnated due to the lack of significant changes in interest rates.
Endless Loop
Due to relatively high mortgage rates compared to a few years ago, people are holding onto their homes, as no one wants to lose a 3% mortgage rate. That explains why existing home sales dropped to their lowest point in nearly three decades last year. When people stop selling homes, supply decreases, compounded by our existing housing crisis (March saw a 14.7% decrease in new housing starts, the lowest since August 2023). This scarcity, coupled with demand exceeding supply, drives up prices (currently equivalent to 3.2 months of supply; a healthy housing market typically needs four to five months of inventory), worsening affordability.
U.S. housing prices have risen by over 50% over the past four years; the income needed to afford a first-time home purchase has nearly doubled since the start of the pandemic, reaching about $76,000 annually, while the median income for a typical household falls about $30,000 short of the income needed to purchase a median-priced home.
It remains unclear when or if mortgage rates will decrease. The rise in February home sales and the decline in March sales represent the uncertainty the housing market faces due to recent mortgage interest rate increases. However, we still predict a gradual increase in new listings and sales, accompanied by continued price appreciation, albeit varying across regions.
Stealth Inflation Hazards
Another factor contributing to the rising cost of housing is the increasingly severe crisis in home insurance. Over the past two years, home insurance prices in the United States have risen by 20% to 40%. If the average premium were to increase by another 6%, the average annual premium would reach $2,522, the dilemma of significantly increased premiums or having their insurance canceled due to concerns from insurance companies about wildfire risks and high rebuild costs. In Florida, the average cost of home insurance is $4,218 per year, which is about 52% higher than the national average. Since 2017, 11 property and casualty insurance companies have liquidated, and other insurance companies have also left the state. Insufficient insurance coverage poses significant risks to property owners, lenders, and other parties. Those in need of insurance may be unable to obtain insurance contracts, couldn't afford them, or are unwilling to pay the high premiums, resulting in inadequate coverage.
Key Takeaways
The surge in homeownership costs reflects various challenges, with soaring inflation highlighting the widespread economic pressures driving up costs across multiple sectors. High mortgage rates and exacerbated supply-demand dynamics leading to reduced inventory have propelled price hikes, especially in areas facing housing shortages, resulting in sustained increases in housing prices, deterring many prospective homebuyers. Moreover, the overlooked home insurance crisis has also exacerbated the economic burden on homeowners, with skyrocketing premiums and inadequate coverage, underscoring the nationwide decline in housing affordability. In conclusion, the combination of financial, regulatory, and environmental factors underscores the need for comprehensive reform to address the systemic challenges driving the escalation of homeownership costs. Failing to address these fundamental issues will leave millions of Americans unable to tackle the escalating housing cost dilemma.
Comments