Mortgage rates have increased rapidly in 2022, as the Federal Reserve continues to fight high inflation. The U.S. weekly 30-year fixed-rate mortgage rose from a slightly more than 3% in early 2022 to more than 7% in late October and leveled off at a rate of 6.42% as of the end of 2022. Mortgage payments have increased from $1,925 on a median priced new home in early 2022 to $2,923 on the same house, a 51% increase. Higher mortgage rates have worsened housing affordability as home prices remain high in 2022. This post presents how mortgage interest rates affect the number of households that would be priced out of the new home market.
The table below shows the number and the percentage of households that can afford a new median priced home at different interest rates ranging from 3.22% to 7.08% in 2022. When interest rates increased from 3.22% to 4.22% as of the middle of March 2022, the percent of households that can afford median-priced new homes decreased to 30.4% from 34.2%. The monthly mortgage payment, which includes principal and interest, but excludes taxes and insurance, for the same home increased from $2,165 from $1,925. Consequently, an additional $10,000 of household income is needed to qualify for a similarly sized mortgage loan. Approximately 5 million households were able to qualify for a mortgage to purchase a new home at the beginning of 2022, before mortgage rates increased, but not afterwards in March.
An increase from 4.22% to 5.22% as of early May 2022 priced additional 5 million households out of the market for the median-priced new homes. When mortgage rates jumped to 7.08% in late October, only 20.3% of households could afford a median priced new home. The monthly mortgage payment rose to $2,923, which requires at least $147,071 household income to qualify for a mortgage for the same home.
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