Affordability Issues May Confront 2019 Homebuyers

Written by
David Mully Read Time: 4 minutes

Buying a home might be more expensive in 2019. Mortgage interest rates are expected to rise throughout the coming months, making it more expensive to take out all mortgage types. The same is true of home prices. Will you still be able to afford the home of your dreams in the coming year?

Mortgage and real estate experts say that the rising cost of buying a home could force buyers to scale back their expectations. That big home in a hot neighborhood? That might be out of reach. But the slightly smaller home in a less-trendy part of town might still be affordable.

If you’re ready to buy in 2019, you might be forced into these choices. Because, as industry experts say, homes and mortgages aren’t getting any cheaper.

"Affordable housing is going to remain a constant theme in 2019," said Jennifer Beeston, branch manager and vice president of mortgage lending with the Santa Rosa, California, office of Guaranteed Rate. "We have hit a crisis level in many parts of the country."

Rising prices, interest rates

In its most recent numbers, the National Association of Realtors reported that the median listing price of a home for sale in the United States hit $293,000 in November. That's up 9 percent from a year earlier.

At the same time, mortgage interest rates are also higher than where they were a year ago. Freddie Mac said that fixed mortgage rates remain on the rise, with the average rate on a 30-year, fixed-rate mortgage standing at 4.63 percent as of Dec. 13. That's up from 3.93 percent a year earlier. The average rate on a 15-year, fixed-rate mortgage was 4.07 percent on Dec. 13, up from 3.36 percent 12 months earlier.

A real estate slowdown on the way?

Michael Zschunke, real estate specialist with Berkshire Hathaway Home Services Arizona Properties in Scottsdale, Arizona, said that the residential real estate and mortgage markets might be in for a slowdown this year because of the lack of affordable options for many buyers.

The problem? Zschunke said that there some people must buy or sell a home because of such factors as job transfers, divorce or a growing family. These people can't wait for more affordable homes to hit their markets.

"The person that is looking to get into a new mortgage will have to enter into one at a higher interest rate and will not be able to afford a comparable home that they had when they were in a lower-rate mortgage," Zschunke said.

The lack of affordable options will also impact sellers, Zschunke said.

"People who need to sell will expect to receive a high price for their current home to retain the same level of lifestyle and comfort they are used to," he said. "Well, if the buyers aren't able to pay the home price the seller is expecting, then we will continue to have a shortage of homes available."

The Federal Reserve will play a role in the strength of the housing market in 2019 and any affordability issues buyers and sellers will face. The Fed's Federal Open Market Committee is expected to hike its benchmark interest rate again this year, a hike that would be its fourth in 2018.

The Fed's rate isn't directly related to mortgage interest rates. But mortgage rates often rise after the Fed boosts its own rate.

Zschunke said that if the Fed does increase its rate, it could make housing less affordable to many buyers. That could lead to a slowdown in the mortgage and housing industry even if the national economy is thriving, he said.

Where are the starter homes?

Brian Davis, a real estate investor and co-founder at Spark Rental, a company that provides automated rent collection services for landlords, said that the affordability challenges are exacerbated by the lack of new starter homes hitting the market.

Davis said that during the last five years, homebuilders have largely avoided building starter homes, choosing instead the higher price tags that come with luxury homes.

"But it appears that many markets now have a glut of luxury homes and a dearth of starter homes, making it difficult for Millennials and Gen Z to enter the housing market as homebuyers."

Some relief for buyers on the way?

Changes might be coming to the housing market, though, said Jonathan Faccone, managing member and founder of Halo Homebuyers in Bridgewater, New Jersey. The reason? It's largely because of the same interest rates that are making homes less affordable, Faccone said.

As interest rates continue to rise, buyers are becoming more reluctant to pay higher prices for homes, Faccone said. As buyers pull back, sellers must adapt, and that might mean that they start dropping their asking prices, Faccone said.

This could mean that housing will begin to slip back into more affordable ranges for more buyers, Faccone said.

"I believe that 2019 will be the start of a shifting market to favor the buyer," he said.