As mortgage rates hit 8%, home 'affordability is incredibly difficult,' economist says (2024)

Lifestylevisuals | E+ | Getty Images

The average 30-year fixed mortgage rate just hit 8% for the first time since 2000, putting housing financing costs at historically high levels.

Given high prices and high interest rates, homebuyers must earn $114,627 to afford a median-priced house in the U.S., according to a recent report by Redfin, a real estate firm, which analyzed median monthly mortgage payments in August 2023 and August 2022.

The firm considers a monthly mortgage payment to be affordable if the homebuyer spends no more than 30% of their income on housing.At the time of the analysis, the average 30-year fixed mortgage was 7.07%.

The median U.S. household income was $75,000 in 2022, Redfin found. While hourly wages in the U.S. grew 5% over the past year, according to the real estate firm, that has not outpaced rising housing costs.

More from Personal Finance:
Medicare open enrollment may help you cut health-care costs
Before hitting a glass ceiling at work, women face a 'broken rung'
Sparse inventory drives prices for new, used vehicles higher

Those current market trends have left homeownership 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.

How home affordability has changed

In August 2020, the typical monthly mortgage payment was $1,581, based on an average interest rate of 2.94%, Redfin found.At the time, the typical house cost roughly $329,000, and homebuyers would have needed an annual income of $75,000 to afford it.

However, those record-low levels were the result of "highly unusual events, like a pandemic and a nearly catastrophic financial crisis," said Mark Hamrick, senior economic analyst at Bankrate.com.

Nowadays, the typical U.S. homebuyer's monthly mortgage payment is $2,866, according to Redfin — an all-time high.

Phiromya Intawongpan | Istock | Getty Images

While the economy and the housing markets move through cycles, it's unlikely for mortgage rates to decline substantially in the near term, especially as the Federal Reserve is expected to keep the benchmark rate high for longer, added Hamrick.

Additionally, the constrained supply of homes for sale is a "direct result of the lock-in effect," said Hamrick. The low supply pressures prices upward as current homeowners are less compelled to move or put their houses on the market as they don't want to trade their low-rate mortgage for one that is significantly higher.

"Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability," Alicia Huey, NAHB's chairman and a homebuilder and developer from Birmingham, Alabama, previously told CNBC.

'This pain shall pass'

"People should know that this pain shall pass," said Melissa Cohn,regional vice president of William Raveis Mortgage in New York. "In the next year or two years, interest rates will be lower, and people will have the ability to refinance."

That said, competition for homes on the market is likely to be worse in a few years as interest rates cool, she said. There are many buyers who remain on the sidelines because of current high rates.

"When interest rates come down, everyone's going to come back to the marketplace," said Cohn.

As mortgage rates hit 8%, home 'affordability is incredibly difficult,' economist says (1)

watch now

VIDEO3:1703:17

Homebuilder sentiment drops as mortgage rates rise higher

The Exchange

How to decide: Buy now or wait?

The decision of purchasing a home is intensely personal and prospective homebuyers should tread with caution, experts say.

"When deciding to purchase a home, it comes down to personal finances, stability and the length of time they plan on owning," said Lautz.

In addition to mortgage costs, prospective homebuyers should keep their other financial goals in mind, as well as maintenance costs, said Hamrick. The biggest regret among recent homebuyers was not being prepared for maintenance and other costs, according to a Bankrate survey.

However, "homeownership is the primary means of wealth creation in this country," said Hamrick.

The typical homeowner has $396,200 in wealth compared to the average renter at $10,400, added Lautz.

First-time homebuyers may consider tapping retirement funds or taking advantage of first-time homebuyer programs that may offer down payment assistance. Buyers can also consider temporary buydowns, which are paid by either the real estate broker or seller, to help lower the monthly payment, said Cohn.

However, it will be important for prospective buyers to work with professionals in the long run, experts say. Buyers should examine all options, consult with realtors about overlook areas and talk with mortgage brokers to consider all the possible loan options, said Lautz.

"This is potentially the most expensive transaction somebody will be associated with in their lifetimes," said Hamrick. "It should be done as well as possible to the benefit of the buyer."

Don't miss these CNBC PRO stories:

  • This bank just hiked its 1-year CD rate to a fresh high
  • How to invest $1 million for the next decade, according to private bankers and wealth advisors
  • This highly profitable industry is booming as the population ages
  • Bank of America sees risks for employers as insurance coverage of weight loss drugs grows
As mortgage rates hit 8%, home 'affordability is incredibly difficult,' economist says (2024)

FAQs

As mortgage rates hit 8%, home 'affordability is incredibly difficult,' economist says? ›

As mortgage rates hit 8%, home 'affordability is incredibly difficult,' economist says. The average 30-year fixed mortgage rate hit 8% for the first time since 2000. Homebuyers must earn $114,627 to afford a median-priced house in the U.S., according to a recent report by Redfin, a real estate firm.

Is 8% a high mortgage rate? ›

Top-tier borrowers could see mortgage rates in the low-7% range, while lower-credit and non-QM borrowers could expect rates well above 8%. Of course, mortgage rates are famously volatile and it's possible a good mortgage rate next year might be substantially higher than what it is today.

Is an 8 interest rate high for a house? ›

Average mortgage rates nearly reached 8% in October of 2023, but they've since come down a bit. However, rates can vary a lot depending on your finances. If you have a lower credit score, you could still get a rate that's in or near the 8% range.

How mortgage rates affect affordability? ›

This decrease in mortgage rates – 80 basis points – allows for a considerable increase in the purchasing power of home buyers for each income group since they can afford to purchase more expensive homes. For instance, buyers earning $100,000 can afford to purchase a home valued at up to $327,460 at a 6.8% rate.

When were mortgage rates at 8%? ›

30-year fixed-rate mortgage trends over time
YearAverage 30-Year Rate
19977.60%
19986.94%
19997.44%
20008.05%
12 more rows

How are people affording these mortgage rates? ›

How can the average person afford a house? The average person can afford a house by choosing an affordable area to live, saving up a strong down payment, and paying off all their debt to make sure they have plenty of margin in their budget.

Is it smart to buy a house when interest rates are high? ›

Pros. Home prices and interest rates could keep rising, so while rates are higher than they were a few years ago, you might get a better deal now than if you wait. With fewer buyers shopping right now due to higher costs of borrowing, you might have more negotiating power.

Will mortgage rates ever go down to 3 again? ›

If inflation falls significantly and the economy enters a deep recession, it is possible that mortgage rates could fall back to 3%. However, this scenario is considered unlikely by most economists.

Is it possible to get a 4% mortgage rate? ›

Aspiring homeowners put off by current mortgage rates can still find newly built homes that come with a 4% mortgage rate, one real-estate expert says. With the 30-year mortgage averaging 7.76% as of Nov. 2, many home buyers find that borrowing costs — and high home prices — make it too expensive to purchase a home.

What is a healthy mortgage rate? ›

A good rate for a mortgage now is anything below the average rate for a 30-year mortgage, which is 6.67% in mid-June 2023. But a good mortgage rate can be different for every borrower, depending on their financial situation and credit score, as well as the type of home loan they're applying for, among other factors.

Do lenders check affordability? ›

A mortgage affordability check considers factors like your income, expenses, and existing debt. Lenders use a loan-to-income ratio, comparing your mortgage amount to your gross annual income. They also assess your credit history and conduct stress tests to ensure you can handle potential interest rate increases.

What is the highest interest rate in US history? ›

The highest the federal funds rate has ever soared was to 20% in December 1980. The lowest it has dropped is effectively 0% in 2008 and 2020.

What is the highest mortgage rate in history? ›

Interest rates reached their highest point in modern history in October 1981 when they peaked at 18.63%, according to the Freddie Mac data. Fixed mortgage rates declined from there, but they finished the decade at around 10%.

What percentage of Americans have a home without a mortgage? ›

Almost 40% of US homeowners own their homes outright as of 2022—many of them baby boomers who refinanced when rates were low.

Is the 8% interest rate high? ›

A good personal loan interest rate depends on your credit score: 740 and above: Below 8% (look for loans for excellent credit) 670 to 739: Around 14% (look for loans for good credit) 580 to 669: Around 18% (look for loans for fair credit)

Can I buy a house with 8% down? ›

For a Federal Housing Administration (FHA) loan, the minimum down payment is 3.5 percent with a credit score of at least 580. If you have a credit score between 500 and 579, you can still get approved, but you'll need a 10 percent down payment.

Is 7% high for a mortgage? ›

LOS ANGELES (AP) — Prospective homebuyers are facing higher costs to finance a home with the average long-term U.S. mortgage rate moving above 7% this week to its highest level in nearly five months. The average rate on a 30-year mortgage rose to 7.1% from 6.88% last week, mortgage buyer Freddie Mac said Thursday.

What does 8 interest rate mean? ›

For instance, an 8% interest rate for borrowing $100 a year will obligate a person to pay $108 at year-end. As can be seen in this brief example, the interest rate directly affects the total interest paid on any loan.

Top Articles
Latest Posts
Article information

Author: Jerrold Considine

Last Updated:

Views: 6352

Rating: 4.8 / 5 (58 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Jerrold Considine

Birthday: 1993-11-03

Address: Suite 447 3463 Marybelle Circles, New Marlin, AL 20765

Phone: +5816749283868

Job: Sales Executive

Hobby: Air sports, Sand art, Electronics, LARPing, Baseball, Book restoration, Puzzles

Introduction: My name is Jerrold Considine, I am a combative, cheerful, encouraging, happy, enthusiastic, funny, kind person who loves writing and wants to share my knowledge and understanding with you.