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.
Given high prices and interest rates, home buyers need to earn $114,627 to afford a median-priced home in the U.S., according to a recent study report from Redfin, a real estate company that analyzed median monthly mortgage payments in August 2023 and August 2022.
(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 the analysis, the average 30-year fixed-rate mortgage was 7.07%.)
However, according to Redfin, the median US household income in 2022 was $75,000. According to the real estate firm, while hourly wages in the U.S. rose 5% last year, rising housing costs have not risen any faster.
More from Personal Finance:
Open enrollment in Medicare can help you reduce healthcare costs
Before women hit a glass ceiling at work, they face a “broken rung”
Tight inventories are driving up prices for new and used vehicles
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.
How home affordability has changed
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 are 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.
Phiromya Intawongpan | Istock | Getty Images
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. Low supply is driving prices up, as are current homeowners They 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 much 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. The biggest regret among recent home buyers, according to Bankrate, was that they weren’t prepared for maintenance and other costs Opinion poll.
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 someone will be involved with in their life,” Hamrick said, “it should be done as best as possible for the benefit of the buyer.”