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Buyers Aren’t Breaking the Bank to Afford Home Prices

September 21, 2021

Home prices have been posting double-digit annual increases. Bidding wars have quickly run up prices above list price. But for the most part, home buyers have not taken on more than they can afford.

Americans devote about 21% of their household income toward their monthly mortgage payments, according to a recent report from realtor.com®. That is higher than the monthly average of 19.6% seen over the last decade. But it is below the percentage of household income seen in 25.3% in August 2008, which led up to a housing crisis and the Great Recession.

Buyers today are in better financial shape than they were in 2008, the report said. They earn more money and have higher credit scores. That has allowed them to weather the higher prices: The median existing-home price for all housing types was $359,900 in July, nearly an 18% increase from a year ago, according to data from the National Association of REALTORS®.

“The key player in keeping payments reasonable is [mortgage] interest rates,” said Jiayi Xu, a realtor.com® economist. “A lower interest rate can increase buyers’ budgets and make monthly payments lower.”

Mortgage rates have been near historical lows for more than a year. The 30-year fixed-rate mortgage averaged 2.86% last week, Freddie Mac reported.

But mortgage rates are expected to rise. NAR is forecasting 30-year rates to rise to 3.5% by mid-2022.

Aside from rising mortgage rates, “if home prices were to keep accelerating by the double digits, that could also be trouble,” realtor.com® said. “Sale prices would need to rise 16.6% to see buyers spending as much of their income on housing as they did in 2008 the housing bubble. This assumes that down payments, mortgage rates, and incomes stay the same.”

If mortgage rates inch up just one-half of a percentage point, more consumers would be spending about 23.9% on housing. But that estimate assumes home prices stay steady from May, realtor.com® researchers said. However, mortgage rates would need to hit 4.2% for 30-year fixed-rate loans to surpass the 2008 record, researchers reported.

Still, “once interest rate increases a little bit, mortgage payments will increase a lot,” Xu said.