Quarter-Point Mortgage Rate Hike Knocks 1.3 Million Households Out of Market

In today’s interest rate environment, a quarter-point rise in mortgage rates would price approximately 1.3 million households out of the market for a new home with an estimated median price of $425,786, according to the latest analysis by NAHB. And if the Federal Reserve moves later today to continue to hike interest rates, this will put upward pressure on mortgage rates.

Monthly mortgage payments would increase as a result of rising mortgage interest rates, and therefore, higher household income thresholds would be needed to qualify for a mortgage. In other words, a quarter-point rate hike would force potential buyers to set their sights on a house selling lower than a median-priced home.

The table below shows the number of households priced out of the market for a new median-priced home at $425,786 for each 25 basis-point increase in interest rates from 3.5% to 8%. When interest rates increase from 6.25% to 6.5%, approximately 1.28 million households can no longer afford to buy a median-priced new home. An increase from 6.5% to 7% prices approximately 1.29 million more households out of the market.

As interest rates rise higher, fewer households are priced out of the market for a median-priced home because only a declining number of households at the higher end of household income distribution would be affected. When interest rates are relatively low, a 25 basis-point increase would affect a larger number of households at the lower and more populous part of income distribution.

Another recent report from NAHB shows how many households in individual states and metro areas would be priced out of a home for each $1,000 increase in the price of a home.

NAHB Principal Economist Na Zhao provided this analysis in a recent Eye on Housing blog post.