The housing market is facing a three-pronged challenge as mortgage demand slows, affordability declines, and rising home prices outpace wage growth. First, mortgage lenders have reported a significant decline in refinancing applications in recent weeks. Refinancing applications had been an important source of lending activity and mortgage originations, as refinancing borrowers demand shorter terms on their home loans and generate more total mortgage volume than purchases.

Second, recent data from the National Association of Realtors confirms that affordability shrank this fall. Increases in home prices that outpaced wage growth have caused the affordability metric to decline for two consecutive months. This trend may continue in 2020 due to low inventory of houses and tight labor markets, resulting in a competitive bidding process where buyers could struggle to purchase homes.

Third, there is a total inventory shortage as more new homes are not being built. The number of new homes on the market is at a level not seen in decades, resulting in limited options for buyers in many areas. This is a contributing factor to the fast-rising home prices that are not being offset by increased wages. As a result, many potential buyers are being excluded from the real estate market and are unable to purchase the homes they need.

Finally, secondary effects of the housing market challenge can already be seen. Rent prices have increased as vacancies decline and housing authorities struggle to meet the demand for affordable housing. This is forcing struggling families to enter the rental market where they are forced to pay higher prices than they could have been able to afford if they were in the home buying market instead. To alleviate some of the pressure of the current housing market, policy makers will need to focus on measures that can increase supply and make affordability accessible.

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