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Any discussion of the housing crisis quickly turns to the culprits: high construction costs, restrictive local zoning laws, and, for the past two years, a sharp spike in mortgage rates.
Another pivotal factor is less frequently discussed: just how much rising prices have outstripped earnings growth, putting homeownership further out of reach for even more Americans.
While the Federal Reserve appears poised to begin cutting interest rates in September, sky-high property prices mean the corresponding drop in mortgage costs will provide only modest relief to prospective home buyers.
What’s happening: The median price of a single-family house in the Boston metropolitan area soared 40 percent over the past five years, according to March 2024 data from the Joint Center for Housing Studies at Harvard University. (The median is the price at which half the homes are more expensive and half are less.)
Meanwhile, average annual wages in the state advanced 23 percent over the five years through May, the most recent data from the US Bureau of Labor Statistics show.
Why it matters: The mismatch between home price increases and wage growth has made buying in the Boston region the most unaffordable it’s been since the peak of the housing boom in the mid-2000s.
According to the Harvard center:
- At the end of last year, the median-priced home in the Boston metro area sold for 6.3 times the median household income, up from 5.3 times in 2019, and just below the average in the three years before the housing bubble burst in 2007.
- A buyer needed an annual income of $217,000 to purchase the median-priced home in the region in the first quarter of the year, ranking Boston 10th among US metro areas.
Mortgage dollars and cents: The median single-family house sold for a record $961,000 in June in the 64 communities tracked by the Greater Boston Realtors Association. (This area includes most of Greater Boston, excluding the North and South shores, and is more expensive than the larger government-defined metro region used in the Harvard data.)
- The monthly principal and interest payment at this price would be about $3,940, using a 30-year fixed loan at 6.9 percent, the average since June, and a 20 percent down payment.
- The monthly bill is 50 percent higher than in 2019, using that year’s median price and average loan rates. Over the same period, wages climbed at half the pace of the monthly payment.
Looking ahead: Rates on 30-year home loans are tied to 10-year Treasury notes. The fixed rate has run an average of 2 percentage points higher than the Treasury yield over the past decade.
- Using economists’ estimates for Treasury yields, the 30-year fixed mortgage could be expected to drop to 5.85 percent by the end of 2025 if the Fed cuts rates as forecast.
- Then, even if home prices remained flat through next year (an unlikely assumption), the typical local monthly mortgage nut would decline only 10 percent to $3,530, and remain 35 percent higher than five years ago.
To be sure: Any reduction in mortgage costs would be good news. Across the country homes are the least affordable than at any time in National Association of Realtors data going back to 1988.
Fed rate cuts would also make it less costly for builders to get construction loans. Increasing the supply of housing would help restrain rising prices.
Moreover, a drop in borrowing costs would chip away at a logjam that has kept many homes off the market: homeowners reluctant to give up their existing low-rate loans.
- Almost 60 percent of mortgage holders had a rate below 4 percent, according to a January report by real estate firm Redfin.
- Nearly 39 percent of homeowners don’t have a mortgage, Census Bureau data from 2022 show.
Final thought: Mortgages won’t stay near 7 percent much longer. Where they stabilize hinges on many factors, including how much the Fed reduces its benchmark rate, how fast the economy grows, and how much debt the federal government takes on to keep operating.
But unless local Massachusetts officials ease zoning regulations and allow more construction of housing, the dream of owning a home will go unrealized for too many of us.
Larry Edelman can be reached at larry.edelman@globe.com.
