Ever since the pandemic, the housing
market has been difficult for buyers, especially for young and first-time
buyers. Housing prices have been rising
at a rate much faster than both the overall inflation rate and the growth in household
income. At the same time, mortgage interest rates jumped 4.5percentage points
between 2020 and 2023.
These changes put potential buyers in a
double bind. Not only are homes more
expensive, but financing the purchase is also more costly. As a result, the average monthly mortgage
payment as a share of a new buyer’s income doubled between 2020 and 2023.
Hence, it should not be a surprise that
homebuying and homeownership declined in North Carolina this decade. In 2024 the percentage of households who were
homeowners was 65%, down from 69% in 2020 and well below the 72% at the
beginning of the 21st century.
These changes are troubling for several
reasons. First, many households who
would prefer to live in single family homes instead of high density units are
being denied that choice. Second,
single-family homes have traditionally been a way for young households to build
wealth as their home increases in value over time. Among all households, including homeowners
and renters, home values account for almost a quarter of all wealth. For just homeowners, home values account for
half of their wealth. And unlike many
investments, such as stocks, it is rare for home values to decline.
Some argue there are also non-financial
benefits to owning a home. Children
living in homes have more access to outdoor activities, thereby getting more
exercise and exposure to fresh air and sunshine. Homes with outdoor space, in particular, can
provide opportunities for children to have chores, thereby allowing them to
learn about work and responsibility. Last, there may be a psychological benefit
to the family from the pride of owning and maintaining a home.
How can we return to an economic
environment where home affordability improves and more households – especially
young households – can easily purchase a home? The answer is easy. We need more
homes built, we need home prices to stop outpacing household income, and we
need lower mortgage interest rates.
Accomplishing this recipe is not easy, but
there are some positive signals giving us hope.
Like the nation, home construction has been inconsistent in North
Carolina. Understandably, there was a
big drop in home building during the pandemic. Subsequently there was a strong
rebound immediately after the pandemic. But the rebound was cut short by the surge in inflation in 2022 and
2023, which pushed up construction costs.
But once the Federal Reserve (the “Fed”) enacted
policies to lower the inflation rate, housing construction recovered. However, during the last two years of 2024
and 2025, there’s been an erratic pattern in home construction with no clear
path. Experts think uncertainties
related to interest rates, tariff rates, and the economic health of households
are affecting builders. However, one
piece of good news is home construction today is running at a higher level than
before the pandemic.
Home prices continue to rise in North
Carolina, but the pace has slowed. When
price changes are tracked for homes with the same features – such as square
footage, number of rooms, etc.- there’s been over a 70% rise between 2020 and
2025. But three-quarters of that
increase occurred between 2020 and 2022. Since then, home prices have been
rising at single-digit annual rates.
Lastly, an overall measure of housing
affordability that accounts for home prices, mortgage interest rates, and
household income shows bad news and good news. The index sank by more than 50% from 2020 to 2024. But during some months in 2025 the index rose
very modestly, mainly due to moderating home price inflation, some reduction in
mortgage interest rates, and improvements in household income.
So, what’s the conclusion? Are there any signs the housing market is
getting better for buyers? Also, what
should you look for to anticipate that buying a home will become easier?
The analysis I’ve presented does indicate
some positives in the housing market in terms of moderating price increases,
continued construction, and modest declines in mortgage interest rates. Indeed,
in the past two years, the 30-year fixed mortgage interest rate fell
three-quarters of a percent to near 6.5%. This is certainly higher than the sub 3% rate immediately after the
pandemic. But that historically low rate
was a result of the Fed pumping enormous amounts of cash into the economy to
overcome the Covid recession. We later
paid for that policy with an annual inflation rate over 9%. While the Fed won’t
push mortgage rates back to 3%, they have strongly indicated they are ready –
perhaps as early as September – to support lower interest rates, including
mortgage rates. So, watch for interest
rate announcements from the Fed.
If the Fed does lower interest rates, the
action could cause increased home construction as builders become more
optimistic about households’ ability to purchase homes. This could moderate home price increases to
be more in line with the improvements in worker earnings that have been
occurring. Therefore, if you’re in the market to buy a home, continue to watch
trends in construction and prices. There
may be some good news ahead.
The housing market has been tough for
buyers in recent years. But are there
some changes occurring that could make a home purchase easier? You decide
__________________________
Dr. Mike Walden
is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina
State University.