Rising interest rates and forecasts of a recession are putting a damper on the homebuying frenzy of recent years. As concerning as such projections may be for consumers and lenders, some financial institutions are noting another factor that is having a cooling effect: the availability of housing, particularly affordable housing.
In many areas of the country, the overall housing supply is a pressing concern, and lenders are in a unique position to observe the effects and contribute to potential solutions. At the start of the 2022 homebuying season, the Federal Home Loan Bank of San Francisco surveyed member financial institutions — banks, credit unions and community development financial institutions — in its tri-state district of Arizona, California and Nevada. Each of these states has experienced a surge in home prices in the past year and is facing a crisis in terms of housing costs.
Home affordability and availability are top concerns
The survey revealed that 75% of lenders expected homebuying activity to decline in 2022. Among those expecting a slowdown, the vast majority, or 89%, found that homebuyers were being deterred by market availability, while one-third believed that potential buyers were simply being priced out of the market. Among the one-quarter of participants who felt activity would increase, respondents believed that rising interest rates would drive buyers to act before rates increased further.
Tellingly, 92% of survey participants expected demand for home financing in 2022 would come from repeat buyers. Current homeowners might be upgrading from starter homes, downsizing, or moving to new communities. These purchasers likely have built up some equity in their existing residences and can benefit from the trend of rising prices to roll their profits into a new place. Homeownership is a proven way to build wealth, and those already well situated may be at an advantage in what remains a competitive market.
Among survey respondents, only 8% anticipated that first-time homebuyers would drive demand for financing products, a finding consistent with many of the concerns voiced throughout the survey. Given the run-up in home prices in recent years, first-time buyers have been challenged to grow their savings at a similar rate to make a sizable down payment. The median sales price of a home in the U.S. reached $428,700 in the first quarter of 2022, a new high, according to the St. Louis Fed. Recent inflation figures underscore the pressure on consumers’ pocketbooks. Additionally, pandemic-era moratoriums on rent increases in some communities are easing, exerting more stress on those seeking to make the leap to ownership.
While affordable housing is in high demand, communities are hard-pressed to create enough units to meet the clear need. This gap was recognized as the top concern related to the home financing picture this year, with market availability, growing housing costs and increasing interest rates following. Housing availability is also impacting the competitive homebuying environment, according to survey participants, even more so than trends of gentrification, aging in place and talent migration.
How lenders can step up
Home affordability and availability are persistent and growing issues, not only in the surveyed states of Arizona, California and Nevada, but in many communities throughout the U.S. Homeownership offers a clear path to building wealth for families today, and that wealth can be passed down to future generations. However, reversing the affordability and availability trends will take considerable effort.
To effect change, both public and private entities are needed to address these challenges and develop sustainable solutions. Financial institutions, in particular, have a large role to play. As integral members of their communities, they have a front-row seat to the unique challenges and opportunities within their neighborhoods. By leveraging establishing relationships and engaging stakeholders, lenders can play a part in alleviating the home availability and affordability strain.
Rising interest rates are expected to slow the appetite for homes, as anticipated monthly mortgage payments could balloon far beyond the comfort level of homebuyers. While attention should certainly be paid to these rising rates, it’s important not to lose sight of housing valuations and their far-reaching impacts on families and their wealth-building capabilities. Lack of affordability and availability will only grow more pronounced without decisive action.
