Home affordability challenges tap the brakes on price growth

The current lack of affordability contributed to slower home-price growth between the second and third quarters, but compared to a year ago, numbers still ran well above inflation, Fannie Mae reported.

The government-sponsored enterprise's third-quarter Home Price Index increased 5.3% on an annual basis, accelerating from a revised 2.9% pace three months earlier. The latest figure, though, is still less than half the rate of growth from a year ago, when it clocked in at 12.3%. 

Quarterly data showed a slightly different story, with the HPI slowing to a seasonally adjusted 2% compared to 2.1% in the second quarter, likely a sign of the effect of sustained upward rate movements this summer, according to Fannie Mae Chief Economist Doug Duncan.

"Slightly slowing house price growth may reflect in part the affordability impact of the higher mortgage rate environment — even though prices were still solidly higher this past quarter than a year earlier," he said in a press release. 

Still, the annual pace came in well above inflation, which the Bureau of Labor Statistics calculated at 3.7% in September. Home price movements so far this year have also run counter to what several analysts expected based on trends seen in late 2022, with some even forecasting negative annual growth by the third quarter. 

But the lock-in effect, in which homeowners are reluctant to give up lower mortgage rates they hold in order to relocate, helped create an inventory shortage, limiting the extent prices would fall. When also factoring in inflation and interest rates now above 7.5%, the current economic environment continues to leave homeownership out of reach for many aspiring buyers.       

The current quarterly deceleration, though, could signal a brief seasonal retreat on the price front, Duncan said. That opinion was shared by other housing economists. 

"We're now in the fourth quarter, when house price appreciation typically slows, and with interest rates both higher and more volatile, it would be reasonable to expect some additional slowing in price appreciation, but the ongoing supply problems continue to drive the larger affordability challenge," Duncan noted.  

On a similar note, Redfin said it had observed an uptick in the frequency of seller price cuts in September, a period when they have historically diminished. 

Ongoing market headwinds have led to calls from housing experts and several industry trade groups emphasizing the need for measures to blunt the effect of interest rates. In addition to a joint letter authored by the Mortgage Bankers Association, National Association of Home Builders and National Association of Realtors sent to Federal Reserve Chair Jerome Powell this week, NAR also cooperated with two community-lending groups in an appeal to U.S. Treasury and White House economic leadership for similar action.   

Mortgage rates hovered near 3% at the end of 2021 before more than doubling by September the following year and briefly rising above 7%. The average 30-year rate again headed above the 7% mark this past August and has remained above that level since. 

While business leaders are hoping to avert any further acceleration of rates, it may take some time before they would fall to a level that would significantly add to for-sale inventory. In a survey conducted in June, Zillow researchers determined homeowners with rates below 5% were twice as likely to remain than relocate. 

Fannie Mae said it expects mortgage rates to remain above 6% until at least the end of this year. Research from Redfin this summer also found over 90% of mortgage borrowers held a rate under that mark, eliminating most refinance incentive.