What 8% mortgage rates mean for home affordability

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%.)

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

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Those current market trends have left homeownership out of reach for many people, experts say.

“Housing affordability is incredibly difficult for potential home buyers,” said Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors.

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.

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 pressure prices upwards 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.

“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…