Prospective homebuyers still face strong headwinds in inflated market

By THE STAR STAFF

Despite a reduction in the average price of homes from December 2022 to February of this year, homebuyers continue to encounter problems finding affordable homes due to the high cost of financing and inflation, the Affordable Housing Index prepared by research firm Estudios Técnicos Inc. (ETI) shows.

Leslie Adames, director of economic analysis and policy at ETI, said the value of the affordable housing index stood at 69% in February, after reflecting a 63% value in January and having fallen to its lowest level, or 59%, in December.

“In other words, a person who wants to apply for a mortgage loan today would only have 69% of the income required to qualify for said loan,” Adames said.

The Affordable Housing Index measures whether or not a typical family that contributes a 20% down payment toward purchasing a home qualifies, based on median income, for a mortgage loan. A value equal to 100% means that the family has the necessary revenue to qualify for a mortgage based on the average price prevailing in the market. A value greater than 100% implies that a homebuyer has more than enough income to be eligible for a home loan. In contrast, values lower than the threshold reflect the opposite.

“Although official figures for the sale price of housing units published by the Office of the Commissioner of Financial Institutions reflected in the aggregate (price of new and used units) a decrease in the average price of $201,162 in December 2022 to $172,983 in January 2023, the truth is that the high cost of financing and the pressure on consumer purchasing power continue to limit the possibilities of qualifying for mortgage loans,” Adames said.

The Federal Reserve has increased the Fed Fund rate nine times to curb inflation, making home financing expensive. The 30-year fixed mortgage interest rate increased from 4.17% in March 2022, when the Fed started the rate hike cycle, to 6.54% in March of this year. Although the market anticipates an additional increase of 25 base points in May, the truth is that there is an environment of great uncertainty regarding the course of action that the Fed will follow in the coming months.

ETI said there is evidence that inflation has gradually declined. However, the rise in the cost of services and wage pressure keep inflation in the United States still above the 2% threshold set by the Fed.

“What is clear is that we are heading toward a normalization of mortgage interest rates after historically low levels for a long period,” Adames said.

The average mortgage rate had stood at 6.05% in the 2003-2008 period. Still, it decreased to 4.0% between 2009 and February 2022 as part of the efforts led by the Fed to address the financial crisis and to add liquidity during the COVID-19 global pandemic. During the past 13 months, it has averaged 5.83%.

Meanwhile, Adames noted that an increase in con- struction costs would be another factor that will continue to put pressure on home prices and affordability, as well as the inflationary pressure that persists in the local economy.

“Although inflation has dropped from 7.2% in July 2022 to 5.8% in February 2023, it still exceeds the historical average of 1.8% from 1985-2019,” he said. “In other words, to measure the problem consumers face today, the value of $1 in December 2006 is equivalent to $0.75 today, reflecting a material erosion in the consumer’s budget and their possibilities of acquiring high-quality goods.”