- The average interest rate on 30-year fixed-rate mortgages reached 8% for the first time since 2000.
- According to a recent report from Redfin, a real estate company, home buyers need to earn $114,627 to afford a median-priced home in the United States.
- “Housing affordability is incredibly difficult for potential homebuyers,” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors.
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The average interest rate on 30-year fixed-rate mortgages reached just 8% for the first time since 2000, pushing the cost of financing home ownership to historically high levels.
According to a recent report from Redfin, a real estate company that analyzed average monthly mortgage payments in August 2023 and August 2022, amid high prices and high interest rates, home buyers will need to earn $114,627 to afford a median-priced home in the United States.
The company considers a monthly mortgage payment affordable if the home buyer spends no more than 30% of their income on housing. At the time of analysis, the average 30-year fixed-rate mortgage was 7.07%.
According to Redfin, the median U.S. household income was $75,000 in 2022. According to the real estate firm, while hourly wages in the U.S. rose 5% last year, rising housing costs did not rise any faster.
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These current market trends have put home ownership out of reach for many people, experts say.
“Housing affordability is incredibly difficult for potential homebuyers,” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors.
According to Redfin, the typical monthly mortgage payment in August 2020 was $1,581, based on an average interest rate of 2.94%. Back then, a typical home cost about $329,000, and home buyers would have needed an annual income of $75,000 to afford it.
However, these record lows were the result of “highly unusual events such as a pandemic and a near-catastrophic financial crisis,” said Mark Hamrick, senior economic analyst at Bankrate.com.
Today, the typical monthly mortgage payment for a U.S. home buyer is $2,866, an all-time high, according to Redfin.
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As the economy and housing markets move through cycles, mortgage rates are unlikely to fall significantly in the near term, especially with the Federal Reserve expected to keep interest rates high for longer, Hamrick added.
Additionally, the limited supply of homes for sale is a “direct result of the lock-in effect,” Hamrick said. The low supply is driving up prices as current homeowners are less compelled to move or put their homes on the market because they don’t want to trade in their low-interest mortgage for a significantly higher mortgage.
“Higher interest rates also increase the cost and availability of construction financing and construction loans, which affects supply and contributes to lower housing affordability,” Alicia Huey, chair of the NAHB and a home builder and developer from Birmingham, Alabama, previously told CNBC.
“People should know that this pain will pass,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York. “In the next year or two, interest rates will be lower and people will have the opportunity to refinance.”
However, competition for homes on the market is likely to become tougher in a few years as interest rates cool, she said. Many buyers are staying behind due to the current high interest rates.
“If interest rates go down, everyone will go back to the market,” Cohn said.
The decision to buy a home is very personal and potential home buyers should proceed with caution, experts say.
“The decision to buy a home comes down to personal finances, stability and how long you plan to own it,” Lautz said.
In addition to mortgage costs, potential homebuyers should keep their other financial goals in mind, as well as maintenance costs, Hamrick said. According to a Bankrate survey, one of the biggest regrets among recent home buyers was that they weren’t prepared for maintenance and other costs.
However, “property is the most important means of wealth creation in this country,” Hamrick said.
The typical homeowner has $396,200 in assets, compared to the average renter’s $10,400, Lautz added.
First-time homebuyers may consider tapping into retirement funds or taking advantage of first-time homebuyer programs that may offer down payment assistance. Buyers can also consider temporary buybacks, paid for by either the real estate agent or the seller, to lower the monthly payment, Cohn said.
However, in the long term it will be important for prospective buyers to work with professionals, experts say. Buyers should explore all options, consult with agents about overlooked areas and speak with mortgage brokers to consider all possible loan options, Lautz said.
“This may be the most expensive transaction that someone will be involved in in their lifetime,” Hamrick said. “It should be done as best as possible for the benefit of the buyer.”
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