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Low Mortgage Rates Won’t Solve the Housing Market’s Biggest Problem

Last Updated September 23, 2020 2:10 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 2:10 PM
  • Prospective homebuyers are taking more time to find a home due to affordability problems and bidding wars.
  • Home prices are increasing due to a shortage of homes to sell.
  • First-time buyers will struggle to buy a home, even if mortgage rates stay low.

The pandemic hasn’t discouraged Americans from buying homes. According to the second quarter of 2020’s Housing Trends Report , 11% of respondents are potential home buyers (planning to buy a house within 12 months), basically unchanged from a year earlier (12%). The data was collected between June 16-28.

desire to buy a home
The pandemic has had little impact on Americans’ desire to buy a home. | Source: Eye on Housing 

Housing Affordability Remains A Big Problem

The report reveals that only 24% of prospective buyers can afford more than 50% of homes available for sale. Although these results show that housing affordability remains a significant challenge, buyers’ expectations for affordability are slightly more favorable than a year ago, when only 20% could afford at least half the homes.

home buying, usa
The percentage of buyers who can afford fewer than half the homes available in their markets was 77% in Q2, down from 80% a year earlier. | Source: Eye on Housing 

The drop in mortgage rates is probably a key factor contributing to this slight increase.


Prospective home buyers are spending more time searching for a home. In Q2 2020, 59% of buyers actively engaged in the purchase process spent three months or more searching, compared to 55% a year earlier.

Although the top reason why long-time searchers still haven’t found a home continues to affordability challenges (39%), this share is much lower than a year ago (50%). Multiple offers are a growing concern: 29% say they have been outbid, against 18% a year earlier.

According to recent data from Clever Real Estate,  more than 40% of homeowners who bought their property during the pandemic reported entering into a bidding war on at least one home.

Bidding wars erupt as a shortage of homes for sale intensifies. Real estate analysts say a six-month supply of homes for sale equates to a balanced market (doesn’t favor either buyers or sellers). As of May, there was a 4.8-month supply of homes for sale  nationwide, according to the National Association of Realtors (NAR). That’s a small seller’s market.

High demand and low supply have contributed to pushing home prices higher.

According to the NAR, the median price of existing homes for all housing types in June was $295,300 , up 3.5% from June 2019, with prices rising in every region.

Javier Vivas, director of economic research for Realtor.com, said: 

Housing affordability is a little easier on paper with low mortgage rates, but the bigger challenge is trying to find a home. Housing demand has increased beyond expectations. When you combine that with historically low levels of inventory, it’s a perfect storm for increased competition and an affordability crisis.

First-Time Buyers Are Struggling to Enter the Market

Rising home prices worsen the affordability problem. Coupled with high unemployment, it will just become harder for first-time buyers to buy a home even with low mortgage rates. Tightening lending criteria are already making it harder to get a mortgage.

We’re already seeing warning signs that first-time buyers may find it difficult to enter the housing market.

According to the Mortgage Bankers Association’s seasonally adjusted index , mortgage applications to buy a home were 2% lower last week than the week before.

The average rate for FHA-backed 30-year fixed-rate mortgages jumped from 3.13% to 3.27%.

This has led to much more significant drops in applications for FHA loans to refinance and buy a home. FHA loans are popular with first-time buyers because they offer lower down payments.

Higher interest rates, along with rising home prices, could weigh on this cohort.

Mike Fratantoni, chief economist for the MBA, said: 

This trend, along with the fact that average loan sizes are increasing, indicate that prospective first-time buyers are being impacted more by the rising economic stress caused by the resurgence in Covid-19 cases, as well as the uncertainty on how the next round of government support will take shape.


Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.