Housing Market May Hit 'Breaking Point,' Economist Warns

Delivery of the mortgage contract and keys closeup. High mortgage rates has made affording to buy a home out of reach for a lot of potential buyers.

High borrowing costs for home loans and rising home prices have made homebuying out of reach for huge swaths of Americans and is bringing the issue of housing affordability to a breaking point, according to a housing economist.

Mortgage rates have soared to two-decade highs at the same time that house prices are at record levels, pushing a number of Americans out of the market while many others appear willing to wait it out.

"Affordability has been stretched and may be at a breaking point, especially for young households who do not own a home and cannot tap into the record-high level of home equity that existing homeowners can access," Danielle Hale, chief economist at Realtor.com, said on the company's website.

Freddie Mac last week reported a slight drop in borrowing costs for home loans on the back of inflation and broader financial conditions, but the rates still remain historically high despite that decline.

Home prices, meanwhile, stabilized some in May, according to Realtor.com data, but they remain nearly 38 percent higher than where they were prior to onset of the COVID pandemic in 2019. The real estate platform pointed out that looking at how expensive homes have become, on a per square footage basis, the median price has jumped by almost 53 percent compared to just five years ago.

"We no longer have a normal real estate market," Tom Hutchens, who leads sales and marketing at Angel Oak Mortgage Solutions, told

Newsweek.

Homeowners sitting on cheap mortgages has also contributed to limited listings of homes and decreased sales, with about 86 percent of outstanding home loans in the U.S. at the moment at 4 percent or lower interest rates.

"Added into the affordability factor is how many people also have extremely low interest rates on their current mortgage, which is just keeping activity at a very low level, both listings and purchases, just transactions as a whole," Hutchens said. "You factor in the home price appreciation that's occurred, really, since COVID and, yes, with the current interest rate environment and I would agree it's pretty fragile right now."

One trend that's emerged that could provide some relief to buyers is the increased availability of homes priced between $200,000-$350,000. This segment of the market saw inventory jump by about 47 percent in May, surpassing all other homes on the market and was an increase from April. But buyers looking into acquiring these homes may have to sacrifice some size, according to Realtor.com.

Elevated mortgage rates are directly contributing to buyers having to pay notably more per month than last year. The higher cost of getting a mortgage with a 20 percent down payment means that a new homeowner may need to pay $158 more per month than just a year ago, an increase of more than 7 percent, according to the data.

Realtor.com estimates that this means that potential new homeowners need to earn $6,400 more a year—to about $120,000 yearly income—to afford to buy a median priced home.

Recent mortgage trends have suggested that high borrowing costs could finally be moving downward. But, with the Federal Reserve holding its interest rates steady at their current two-decade high last week and signaling that they are willing to retain it at that higher number for longer, home loan costs could remain elevated for the foreseeable future.

"I expect that peak mortgage rates likely remain in the rearview, but volatility remains a risk, complicating moving decisions for home sellers, homebuyers and renters alike," Hale noted.

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