Affordability FIopped In 2023, But Redfin Predicts A Brighter New Year

This year was one of the worst on record for affordability. But with the market at an all-time low, the only move now is up, according to a new analysis by Redfin.

A homebuyer with the median U.S. income needed to spend 41% of their earnings on monthly home costs in 2023, a record high in Redfin’s data (dating to 2012) and fully 10% more than just two years ago.

In some hot markets, like California’s Anaheim and San Francisco, that number jumps to more than 80%.

But Redfin expects mortgage rates and home prices to both cool in 2024, paving the way for more Americans to buy their dream home.

“A perfect storm of inflation, high prices, soaring mortgage rates, and low housing supply caused 2023 to go down as the least affordable year for housing in recent history,” said Redfin Senior Economist Elijah de la Campa.

“The good news is that affordability is already improving heading into the new year.”

Mortgage rates have dropped 80 bps in the last six weeks, driven down by disinflation and strong economic indicators.

Wall Street expects the FOMC to hold interest rates at their current 22-year high in its December meeting next week, which would help stabilize rates.

Plus, though Fed Chairman Jerome Powell recently made comments suggesting rate cuts aren’t officially on the table, investors are hopeful that significant policy changes will come as soon as the first half of 2024.

But some analysts are skeptical of a major market shift next year. Even Redfin notes that Austin is the only metro that actually saw affordability increase this year.

First American expects wage growth to slow in the coming year while home price appreciation continues to soar, putting pressure on buyers.

However, price growth should slow to +3-4%, closer to historical averages, while mortgage rates sink to the mid-6%s, making housing about 5% more affordable based on FirstAm’s Real House Price Index.

“However, even at this level, affordability will remain more than 40% worse than in February 2022, just before the Fed started increasing rates,” Chief Economist Mark Fleming said. “In 2024, the housing market will not be pandemic hot, nor monetary-tightening cold, but it may not be quite right either.”