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America Faces a Housing Bust

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America’s housing market still had a lot going for it at the start of this year. It wasn’t enough to surmount a doubling in mortgage rates in combination with persistently high prices.

The National Association of Realtors’ measure of home affordability, based on mortgage rates, home prices and household income, showed that as of April existing homes were at their least affordable level since July 2007. They are even less affordable now. On Tuesday, the NAR said the median price on an existing home rose to $407,600 in May from $395,500 in April, while Freddie Mac reported last week that the average rate on a 30-year fixed mortgage was 5.78%, up from 5.23% a week earlier and from an April average of 4.98%.

It is a big change from January, when the average rate was 3.45%, and the affordability measure, while not as easy as it was earlier in the pandemic, was still better than it had been through much of the 1990s and 2000s. Back then, another banner year for housing seemed likely. The job market was strong, household balance sheets were in good shape, the persistence of hybrid work-from-home plans continued to make living farther away from city centers seem reasonable and more of the millennial generation seemed primed to become homeowners. All those things still seem true, but the numbers don’t work any more.

Compounding the problem, a lot of people who already own homes are effectively stuck in them. The last time mortgage rates were as high as they are now was in 2008. Anybody who bought a house since then got a better rate than they could now. Moreover, there have been several waves of refinancing since 2008, the last one coming during the pandemic, when the average mortgage rate got as low as 2.65%. With the exception of people who have paid off or nearly paid off their mortgage, moving to a new home isn’t very easy—and of course they need to find someone to buy their old home first.

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So it seems as if, disappointing as some of the recent housing data have been, it will only get worse in the months ahead. The NAR on Tuesday said that existing-home sales in May slipped to 5.41 million from April’s 5.6 million, at a seasonally adjusted annual rate—the lowest level since July 2020. But the figures are based on closings, so many of the buyers locked in rates at earlier, lower levels. When home builder Lennar reported results for its fiscal quarter ended May 31 on Tuesday, it said that the combination of rising rates and rising prices “began to drive buyers in many markets to pause and reconsider.”

It is difficult to imagine a revival in the housing market unless homes get a lot more affordable. The boom brought on by the pandemic was nice while it lasted. Here comes the bust.

Despite forecasts for a cooling housing market in 2022, U.S. home prices are still hitting record highs, even with mortgage rates surging in recent months. WSJ’s Dion Rabouin explains what’s driving demand, evidence of a slowdown on the horizon, and what that could mean for the economy. Photo composite: Ryan Trefes

Write to Justin Lahart at justin.lahart@wsj.com

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