Surge in Mortgage Rates Spikes Unaffordability for New Homes

New home buyers didn’t catch any breaks during October 2024 as the new home affordability crisis extended into its 31st month.

Both the median price of new homes sold and mortgage rates rose during the month. This combination of factors packed a one-two punch against affordability and reversed what had been a trend toward greater affordability in the preceding two months.

The median sale price of a new home increased from $426,800 in September to an initial estimate of $437,300 in October 2024. Meanwhile, the average 30-year conventional fixed-rate mortgage increased from September’s 6.18% to October 2024′s 6.43%. Combined, these two increases boosted the size of the monthly mortgage payment on the median new home sold to 40% of the estimated median household income in the United States.

That negative reversal for the relative affordability of new homes is presented in the following chart:

This data doesn’t fully capture the impact of what happened to make new homes so much more unaffordable for the typical American household during October 2024, where we have to point to the surge in mortgage rates as the primary culprit. HousingWire describes how mortgage rates changed since they bottomed at about six percent at the end of September 2024:

The mortgage rate increases of the past two months continued this week even as the pace of increases showed more signs of slowing. But rates have also crossed the 7% threshold once again, which could represent a mental hurdle for home shoppers.

According to data at HousingWire’s Mortgage Rates Center, the average 30-year conforming rate rose 3 basis points (bps) during the past week to reach 7.02% on Tuesday. The average 15-year conforming rate of 6.98% remained the same as a week ago.

Why does mortgage rates rising by one percent have such an impact on affordability? Here’s how Under30CEO describes the financial impact for a prospective home buyer, although in their example, they were borrowing $200,000 to buy a house with mortgage rates jumping from 4% to 5%:

So, imagine you’re sitting at the kitchen table, sipping your morning coffee, and you hear on the news that interest rates just went up by 1%. You might be thinking, “Okay, but what does that mean for me?” Well, if you have a mortgage, this could mean a bump in your monthly payments. A 1% increase might not sound like much, but it can add a noticeable amount to what you pay each month. Let’s say your mortgage was $200,000 at a 4% interest rate. Your monthly payment would be about $955. But if the rate jumps to 5%, that payment climbs to around $1,074. That’s almost $120 more each month!

Now, let’s talk about the long haul. Over the life of a 30-year mortgage, a 1% rate increase means you’ll pay a lot more in interest. It’s like the difference between buying a used car and a new one. You might not feel it right away, but over time, it adds up. For example, on that same $200,000 loan, you’d end up paying about $43,000 more in interest over 30 years if your rate went from 4% to 5%. That’s a chunk of change that could’ve gone towards something else, like a vacation or college savings.

Assuming you can find a new home selling somewhere that you would only need to borrow $200,000 to buy, your monthly payment at 6% interest would be $1,199 according to Bankrate’s Mortgage Calculator. With a 30-year conventional fixed-rate mortgage at 7%, your monthly payment would be $1,331. That’s a $132 per-month increase. Over 30 years, that 7% mortgage would cost you $47,520 more than a mortgage at 6%.

It’s not a surprise then that rising mortgage rates make homes less affordable for many. Fewer people can afford to buy and that limits the number of sales. No wonder the U.S. new home market has stagnated below its December 2020 peak.

References

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 26 November 2024. 

U.S. Census Bureau. New Residential Sales Historical Data. Median and Average Sale Price of Houses Sold. [Excel Spreadsheet]. Accessed 26 November 2024. 

Freddie Mac. 30-Year Fixed Rate Mortgages Since 1971. [Online Database]. Accessed 2 October 2024. Note: Starting from December 2022, the estimated monthly mortgage rate is taken as the average of weekly 30-year conventional mortgage rates recorded during the calendar month.

Image Credit: Microsoft Copilot Designer. Prompt: “An editorial cartoon of a real estate agent talking to a new home buyer who is upset about rising mortgage rates”.