Homeownership affordability plummets as mortgage rates hit multi-decade highs

• Homeownership is increasingly unaffordable due to high mortgage rates and rising costs.
• The income needed to afford a home is now 1.5 times the median income, up from parity in 2021.
• Mortgage rates have risen to their highest level since 2023.
• Home prices have softened in some markets like Austin, but not enough to significantly improve affordability.
• New single-family home sales rose in August, but existing home sales declined.
• The share of active listings with a price drop was near 20% in August.

Homeownership in the U.S. is becoming increasingly unattainable for many Americans as mortgage rates continue to climb, exacerbating existing affordability challenges. The average 30-year fixed mortgage rate stood at 7.4% for the week ending October 8, a level that makes purchasing a home difficult for both first-time buyers and those looking to move.

According to Domonic Purviance of the Federal Reserve Bank of Atlanta, the "qualified income" needed to afford a home—defined as spending no more than 30% of income on mortgage payments, property taxes, insurance, and a down payment—has significantly outpaced actual median income. As of July, this required income was about 1.5 times the median income, a stark contrast to a few years ago when median income earners could typically afford a home.

Purviance stated that incomes would need to increase by 46% to restore affordability if home prices and interest rates remained constant. He attributed the widening affordability gap primarily to the recent surge in mortgage rates. While some markets, like Austin, have seen home prices soften, the decrease has not been substantial enough to make a significant impact on overall affordability. Purviance cautioned against expecting prices to return to pre-pandemic levels.

For natural market forces to improve affordability, Purviance suggested that interest rates would need to fall below their longer-term average. This could encourage homeowners with lower rates to sell, potentially putting downward pressure on prices. Despite these challenges, new single-family home sales saw an increase from July to August, though existing home sales declined.

Daryl Fairweather, chief economist at Redfin, noted that buyers might find opportunities as some existing homeowners become more motivated to sell. Redfin data indicated that the percentage of active listings with a price reduction was near a high of 20% in August, although the average size of these price drops has decreased since 2012. Fairweather also pointed out that in areas with significant new construction, builders are often offering incentives such as mortgage rate buydowns or cash at closing to attract buyers.