The Impact of Mortgage Rates on Housing Affordability

According to the latest press release from Freddie Mac, the average rate on a 30-year fixed-rate mortgage has now risen to approximately 7.25%. Based NAHB’s priced-out data, at this rate, only about 27.5 million (out of a total of 134.7 million) U.S. households could afford to buy a median-priced new home, based on their incomes and standard underwriting criteria.

As many analysts have noted, interest rates and house prices interact with each other to determine new home affordability. For example, if the costs of producing homes and the resulting prices to buyers were reduced (for instance, by adopting some of the measures in NAHB’s 10-point plan to lower shelter inflation), more than 4.5 million households would be priced into the market by reducing interest rates from 7.25% to 6.25%, which was the mortgage rate in mid-February 2023.

For example, in the table above, approximately 27.5 million households are able to afford the median-priced new home at a 7.25% mortgage rate. If the rate fell back to 6.25%, the table shows an additional 4.5 million (for a total of approximately 32 million) households would be priced into the market.

This change is particularly relevant, as NAHB is currently projecting that the average mortgage rate will be near 6.25% by the end of 2024 — although there is considerable uncertainty around this number, largely because of uncertainty about what monetary policy the Federal Reserve will find necessary to contain inflation. The above table can be used to track the impact actual changes in mortgage rates are having on affordability of new homes over the rest of the year.

Paul Emrath, vice president for survey and housing policy research for NAHB, provides more information in this Eye on Housing post.