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Mortgage Rates Would Need to Rise to 7% Before Median Home Unaffordable


Just about everyone knows mortgage rates have shot up rather dramatically recently. And now some of the major market players are actually addressing the matter, which seems a tad unusual.

This morning, mortgage financier Freddie Mac discussed how 30-year fixed mortgage rates have increased about 40 basis points (0.40%) since May, rising from the 3.5% range to about 4%.

Clearly this is not good for the nascent housing recovery, nor is it good for homeowners looking to qualify for a mortgage.

But just how much of an impact will the rising mortgage rates make? Freddie answers this question in their June 2013 U.S. Economic & Housing Market Outlook.

Some Real Estate Markets Are Already Unaffordable

mostly affordable

Funnily enough, even when mortgage rates were at record lows, housing was unaffordable in some of the most popular metropolitan areas of the country.

For example, in Los Angeles, the median sales price was $365,000 in March, while the median family income was $65,000.

Using a maximum 28% housing debt-to-income ratio and an assumed 10% down payment, Freddie concluded that Los Angeles was already too pricey for the average resident.

Put simply, the average home in LA would require a monthly housing payment (including taxes and insurance) in the ballpark of $2,200, well above the $1,500 or so available.

So for Los Angeles residents, the rising mortgage rates will just reduce the pool of eligible buyers, which may actually be a godsend for the more well-to-do prospective buyers looking to reduce pesky competitors.

Of course, affordability varies widely, even if just nearby. In Riverside, the median family income of $60,000 is enough to purchase the median home price of $219,000, even with a 4% mortgage. But if rates rise to 5%, properties in Riverside will also become unaffordable to many.

The same goes for other metros throughout the country, including Denver and Washington D.C., which would become unaffordable at 5%.

[See my mortgage payment graphs to compare different rates and payments.]

New York and Los Angeles Need More than Low Mortgage Rates


Unsurprisingly, the New York City and Los Angeles metros are the least affordable in the country, and the most vulnerable to interest rate spikes.

Both are already unaffordable with mortgage rates at 3.5%, and it just gets worse as rates climb higher.

With rates around 4%, the max purchase price is the NYC-area is about $298,000, while it’s $249,000 in LA. Good luck finding inventory at those price points…

If rates climb to 5%, the maximum sales prices fall to $274,000 and $229,000, respectively.

At 6%, you’re looking at a max of $252,000 and $211,000, which is downright impossible to find, especially if home prices are expected to rise in tandem with rates.

As you can see from the affordability chart above, things are pretty bleak for the prospective homeowner regardless of rate.

And this is the case in other hard-hit areas of the country, including Miami, San Diego, the Bay Area, Boston, Denver, Portland, etc.

Two notable exceptions are Las Vegas and Phoenix, where mortgage rate increases alone won’t end the home appreciation party.

[What mortgage rate can I get with my credit score?]

Midwest Affordable, Even If Rates Double

still affordable

The story is quite a bit different in other popular metros throughout the nation, including Chicago, Houston, and Dallas.

In all three areas, mortgage rates could climb to 8% and still be affordable for the median household.

For the nation as a whole, rates would need to increase to nearly seven percent for the median priced home to be deemed unaffordable to the average family.

Yes, higher rates would certainly reduce the maximum purchase price, but the impact is a lot more muted.

Here’s the good news – long-term fixed mortgage rates are only around 4%, despite the recent doom and gloom.

And they’re largely expected to steady at current levels, and eventually rise to just 4.5% in 2014.

In other words, it’s not as bad as the headlines let on, though if you’re in a more expensive market, you’ll definitely feel it.

Read more: How much house can I afford?

1 thought on “Mortgage Rates Would Need to Rise to 7% Before Median Home Unaffordable”

  1. The rise in rates has already disqualified many purchasers as they are out looking for homes which are tough to find.
    It’s a sellers market for the most part right now with multiple offers and this hurts the first time buyer the most.

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