Mortgage rates have increased rapidly in 2022, as the Federal Reserve continues to fight high inflation. The U.S. weekly 30-year fixed-rate mortgage rose from a slightly above 3% in early 2022 to more than 7% in late October and leveled off at a rate of 6.42% as of the end of 2022. Mortgage payments increased from $1,925 on a median priced new home in early 2022 to $2,923 on the same house, a 51% increase. Higher mortgage rates have worsened housing affordability as home prices remained high in 2022. This post presents how mortgage interest rates affect the number of households that would be priced out of the new home market.
The table below shows the number and the percentage of households that can afford a new median priced home at different interest rates, ranging from 3.22% to 7.08% in 2022. When interest rates increased from 3.22% to 4.22% as of the middle of March 2022, the percent of households that can afford median-priced new homes decreased to 30.4% from 34.2%. The monthly mortgage payment, which includes principal and interest, but excludes taxes and insurance, for the same home increased from $2,165 from $1,925. Consequently, an additional $10,000 of household income is needed to qualify for a similarly sized mortgage loan. Approximately 45 million households were able to qualify for a mortgage to purchase a new home at the beginning of 2022, before mortgage rates increased.
An increase from 4.22% to 5.22% as of early May 2022 priced additional 5 million households out of the market for the median-priced new homes. When mortgage rates jumped to 7.08% in late October, only 20.3% of households could afford a median priced new home. This means approximately 18 million households were priced out from the start of 2022 to October. The monthly mortgage payment rose to $2,923, which requires at least $147,071 household income to qualify for a mortgage for the same home.
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It is true that the payments are up and less people qualify but these numbers are extremely conservative. Ask any lender or loan officer if loans get approved with a housing payment ratio to monthly income over 28%. Fannie/Freddie and FHA all accept higher debt ratios that this article is using. Implying buyers need $147,071 of income to qualify for a $450,700 price home is “piling on” in a tough market.
Great information. Very clearly shows the impact of the not only the increased interest rates, but also how inflation has impacted housing affordability. I will use this at our new home builders association meeting.