While many first-time homebuyers struggle to come up with a down payment in today’s market, one of the long-term affordability issues centers on monthly payments due to rising mortgage rates. According to statistics, the current 30-year fixed mortgage interest rate is 7.18% Freddie Macin stark contrast to the rate below 3% early in the pandemic.
Soaring mortgage rates are leading to higher monthly payments for new buyers. In fact, monthly payments are up 60% year-over-year (or $871), according to Real Estate Data and Analytics black knight. Black Knight data shows borrowers with 30-year fixed-rate loans had average monthly principal and interest payments of more than $2,300 in July 2023, the highest average principal and interest payments on record.
More than half of homebuyers now face monthly mortgage payments of at least $2,000, while a quarter are paying $3,000 or more, Black Knight data shows.At the same time, the average U.S. Monthly income in July 2023 Just $4,600, according to economic data firm CEIC. This means some homeowners may be spending more than 60% of their salary on their mortgage.
Keep in mind that principal and interest figures are before expenses such as property taxes and insurance are considered.
“When will $2,000-a-month mortgages become the norm?” Question Andy Walden, Vice President of Corporate Research, Black Knight Report. “Nearly a quarter of July homebuyers paid more than $3,000, compared with just 5% in 2021. We’ve been talking about affordability for a while, but this makes it even more clear.”
Buck Horne, director of equity research, said that based on current mortgage rates, average income levels and house prices, most first-time buyers with a “minimum” down payment are likely to spend more than 40% of their monthly income on housing. . Homebuilding and residential real estate investment trusts of Fortune 500 investment banking firm Raymond James.
“All else being equal, this number is certainly unsustainable relative to the long-term average of closer to 30%,” Horne said. wealth.
For first-time homebuyers, higher monthly payments can be especially challenging.The median monthly household income for renters is $3,900, said Mark Fleming, chief economist at First American, a Fortune 500 financial services company. wealth. That means a $2,000 principal and interest payment would take up 51 percent of a potential homebuyer’s monthly budget, he added.
“This is generally considered a significant burden and is one of the reasons affordability is at its lowest level in 30 years, according to our estimates,” Fleming said. “The combination of higher interest rates and continued price increases makes affordability a real challenge for first-time buyers.”
Ultimately, Horn said, some of the factors keeping buyers (not necessarily new homeowners) in the market include the financial backing of the home for a down payment and buyers using “substantial amounts” of home equity from existing home sales to offset a new home mortgage. .
With housing affordability largely challenged by the Federal Reserve raising mortgage rates, it’s nearly impossible to predict when future homeowners will get some relief.
“Until the Fed is clearly done raising rates, there will be upward pressure on mortgage rates,” Fleming said. “But given the historically rapid and decisive tightening of monetary policy we just experienced, much of the adjustment in mortgage rates is likely to It has happened.”
Overall, rising mortgage rates, combined with tight housing inventory and pent-up demand, are likely to squeeze new buyers for some time.
“Any relief in mortgage rates is likely to be absorbed by higher house prices,” Horn added. “As a result, current mortgage payment levels are likely to become the new normal for the foreseeable future, before a more fundamental break in the larger economy disrupts household balance sheets.”
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