Historic Unaffordability Squeeze To Weigh Down Home Prices In 2025 | Lance Lambert

**Adam Taggart** (0:05)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. While 2024 was a fantastic year for stocks and bonds, the housing market has fared less well. Instead, 2024 was the year that gravity caught up with home prices. They've stopped rising nationally for the most part, and certain once red hot cities are now starting to see clear declines as inventory surges. Will prices start falling from here nationally under today's higher for longer mortgage rates, or will the housing market prove more resilient as we enter into 2025? To find out, we'll talk with real estate analyst Lance Lambert, former real estate editor for Fortune and now co-founder and editor of ResiClub. Lance, thanks so much for joining us today.

**Lance Lambert** (0:51)
Thank you for having me, Adam. Housing, housing, housing, there is always so much going on, and especially right now. We're in this period where with affordability, when you take into account incomes, home prices and mortgage rates, this is the second worst period for home affordability, going back to the 70s, right? And really the only comparable one is like the early 80s. And that's taking into account home prices, incomes and mortgage rates. But if you add in things like property taxes and you add in insurance, John Byrne's calculation shows that actually we are really close to the worst affordability ever for the US housing market. And another factor there is back in the 1980s, if you bought a home, a huge proportion of your payment was the mortgage rate, right, if you were financing. And over time, as rates came down and you were able to refi that, that payment got to be smaller and smaller, proportion of your income. If we don't have that backdrop play out for the macro side, with rates coming down a lot and the ability to refi that much, that payment relief won't be there. And then the other factor is, if you were somebody who was like, you know what, I'm not going to finance, I'm going to go buy this house outright with cash. Well, because the price to income ratio was so low back in the 80s, you could probably, some people could do that, right? Whereas today, if you decided, you know what, rates are too high, I'm not going to finance, I'm going to buy this outright. You don't really have relief because prices relative to incomes are so high. So I think this affordability squeeze that we're in is very historic. We're in an interesting chapter for housing. And that affordability squeeze is being felt. And it's being felt in a few different ways. The first and the most immediate was that back in 2022, existing home sales pulled way back. Because one, a lot of that housing demand that was rampant during the pandemic, boom, pulled back as rates went up. But the other factor there is that there is somewhat of a lock-in effect where people who have a 2-3 percent mortgage rate don't want to go get a 6-7. And it's not necessarily that they don't want to. It's around half of homeowners today. And it's actually above, but I don't want to give a number that's too high. But it is over half. Could not afford to buy their current home at today's mortgage rates given their income. They wouldn't be eligible for it. So a lot of the lock-in effect is not just that they don't want to lose the rate, it's that they're not even eligible to, because that affordability shock is so big. And so the existing home sales has pulled way back. And we've had constant forecast from the industry saying, okay, the worst is over, that's going to start to rebound. It hasn't really happened. And so 2023 was the worst year for existing home sales since 1995 This year will be the worst again since 1995, a little worse than 2023 So that rebound there that people keep talking about hasn't really come for the existing home sale market. Now, when it comes to prices, it's been a little bit of a difficult story and a lot of bifurcation. Because at the end of the day, housing and prices for any good or asset is about the supply-demand equilibrium. Demand pulled back a lot, but in some of these markets, the supply had not necessarily came up, right? And so you can have a supply-demand curve where the demand comes way down and maybe the price growth decelerates, but it still stays positive because of where the equilibrium lands. But over the past, and I'll pull up the data in a second, over the past couple of years, some of these markets have finally seen active inventory, which I really consider the proxy for the supply-demand equilibrium, rebound up, right? And it's not necessarily that there's a lot of new listings coming in the market, because there is still that lock-in effect that's holding churn back. But it's the fact that what's coming on isn't selling as fast as it was before. And it isn't getting absorbed by the marketplace as quick as it's coming on. And so the active inventory is slowly beginning to build. And if you're fine, I'll go ahead and share my screen to show a rundown of that inventory picture.