New NAHB 2021 Priced-Out Estimates showed that 75.1 million households are not able to afford a median priced new home, and that an additional 153,967 would be priced out if the price of a home goes up by $1,000. A second post presented the housing affordability pyramid, showing how many households have sufficient income to afford homes at various price thresholds.
The NAHB 2021 priced-out estimates also detailed how interest rates affect the number of households that would be priced out of the new home market. For a new home with an estimated median price of $346,757 in 2021 and the recent 30-year fixed-rate mortgage rate of 3%, a quarter percentage point increase in the interest rate would price out approximately 1.3 million households. The monthly mortgage payments will increase as a result of rising mortgage interest rates, and therefore higher household income thresholds would be needed to qualify for a mortgage loan.
Table below shows the number of households priced out of the market for a new median priced home at $346,757 by each 25 basis-point increase in interest rates from 1% to 9%. When interest rates go up from 1.75% to 2.00%, around 1.2 million households could no longer afford buying median-priced new homes. An increase from 2.75% to 3.00% could price approximately 1.3 million households out of the market. However, at considerably higher rates this number tapers. For example, increasing from 5.25% to 5.5% mortgage rates prices out 1.1 million households. This diminishing effect happen because only a declining number households at the higher end of household income distribution will be affected. On the contrary, when interest rates are relatively low, a 25 basis-point increase would affect a larger number of households at the lower and more populous part of income distribution.
In my opinion, anyone priced out with interest rates under 4% is either ooking at homes priced well above their means or should not be considering owning a home at present. Current rate are not even half of what would be considered normal.