US housing affordability has taken another turn for the worse, according to RBC Capital Markets. The investment bank says that nearly all of the top 40 builder markets are now less affordable than their long-term averages, with conditions close to the worst levels seen last spring. The culprit: mortgage rates hovering around 6.9% and home prices that have been slow to fall.
RBC tracks affordability by comparing the monthly payment on a median-priced existing home with median income. Earlier this year, there was a brief improvement as rates dipped and incomes grew. But that relief has faded. Borrowing costs have stayed high, and home prices have proven "sticky" — meaning they haven't dropped quickly even as demand has cooled.
Why affordability keeps slipping
The housing market has been stuck in a tough spot for over a year. When mortgage rates rise, monthly payments climb, making it harder for buyers to afford a home. At the same time, many existing homeowners are locked into low-rate mortgages from earlier years, so they're reluctant to sell. That keeps inventory tight and prices from falling sharply.
RBC's data shows that the affordability squeeze is widespread. Nearly all of the top 40 builder markets — the largest metro areas for new home construction — are now worse off than their long-term averages. That means the problem isn't isolated to a few expensive cities; it's affecting buyers across the country.
The recent rise in mortgage rates is tied to movements in Treasury yields. As Treasury yields have climbed, mortgage rates have followed, pushing them to levels not seen in over a year. For a typical homebuyer, even a small increase in the rate can add hundreds of dollars to a monthly payment.
The Fed factor
Adding to the pressure is the possibility that the Federal Reserve could raise its benchmark interest rate at its meeting next week. While the Fed doesn't directly set mortgage rates, its policy decisions influence the broader borrowing environment. If the Fed hikes, it could push Treasury yields higher, and mortgage rates could follow.
Traders are currently pricing in a decent chance of a hike, according to the brief. That expectation alone can keep rates elevated, as lenders anticipate future moves. A hike would likely delay any meaningful relief for homebuyers, extending the period of stretched affordability.
The Fed's stance is part of a broader global picture. Central banks around the world are grappling with inflation and rate decisions. For instance, Turkey has held rates at 37% while signaling possible cuts, and Chile's inflation has accelerated, complicating its rate path. The US Fed's next move will be closely watched by markets.
What it means for investors
For everyday investors, this news has several implications. First, if you're thinking about buying a home, affordability is likely to remain challenging in the near term. Higher mortgage rates mean higher monthly payments, so it's important to budget accordingly and consider how much house you can truly afford.
Second, for those with existing mortgages, the current rate environment makes refinancing less attractive. Refinancing demand has already slowed as rates have climbed, and a potential Fed hike could keep it that way.
Third, for investors in homebuilder stocks or real estate investment trusts (REITs), affordability is a key metric. When homes become less affordable, demand can weaken, which may affect builder revenues and property values. However, the "sticky" home prices suggest that builders may not be forced to cut prices dramatically, which could support their margins.
It's also worth noting that the housing market is just one piece of the broader economy. High mortgage rates can weigh on consumer spending and confidence, which in turn affects corporate earnings and stock market performance. Inflation fears and oil prices are also in the mix, keeping the Fed cautious.
Ultimately, the path of mortgage rates will depend on the Fed's next moves and inflation data. If the Fed pauses or signals cuts, rates could ease, providing some relief. But if it hikes, affordability could worsen further. For now, the message is clear: housing affordability remains stretched, and relief may be delayed.
