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Why homebuying slumps: 3.5% median mortgage rate

July 13, 2023

“Numerology” tries to find reality within various measurements of economic and real estate trends.

Buzz: The median rate on all existing first mortgages across the nation is 3.5%.

Source: My trusty spreadsheet looked at the meaning of this stunning number, which was provided by the mortgage tech and data provider Black Knight.

Fuzzy math: That means homeowners sitting on a 3.5% mortgage rate lost 33% in borrowing power in today’s 7% market.

Topline

The Federal Reserve’s cheap-money policies of the early pandemic era, used to keep a locked-down economy in gear, were the gift that killed the housing market.

Think about how much you can borrow with a $2,000 monthly house payment this year, as the Fed fights inflation with rate hikes.

At today’s 7%, you’d get $301,000 for 30-years. Current owners, with their median 3.5% mortgage rate, got $445,000. So a typical owner would have to find $144,000 just to meet the mortgage they presently have on their home.

That’s what rising rates do: slash how much one can borrow for the same payment. In this case, it’s one-third less – and that’d be true no matter how big of a payment you could afford.

Details

Consider the pickle for many mortgaged households, which can’t easily move because loan rates have roughly doubled.

Owners who managed to land a 3% mortgage would be hit with a 37% loss of buying power if they replaced the current mortgage with a 7% loan. And, according to Black Knight data, 30% of all mortgaged homes have first mortgages at or below 3%.

Next, ponder owners with 4% mortgages. They face a 28% loss of buying power. Black Knight says 66% of all mortgages are at or below this rate.

Owners paying 5% face a 19% loss of buying power. (85% of all mortgages are at or below this rate.) Even owners at 6% face a 10% loss of buying power (just 7% of all mortgages are at or above this rate).

Bottom line

The Fed’s high-rate policies throttled house hunting. Homebuying nationwide hit a lethargic 4.3 million annual pace in May, according to the National Association of Realtors.

Just how slow was that?

37% below the pandemic’s high of 6.85 million in November 2020.
20% below the 5.38 million average of pre-pandemic 2015-19.
And the last time it was slower was in 2010, long before the coronavirus hit.

Few can make today’s mortgage finances pencil out. Black Knight found that for June, with 30-year rates at 6.67%, homebuyers are facing a record-high $2,258 monthly payment for a loan on a median-priced U.S. home — and that’s with 20% down.

That June payment also claims 35.7% of the US median household income, the second-least affordable month in the past 37 years. (The worst affordability, by the way, was 36.7% in October when rates last topped 7%.)

Looking back, affordability in the ugly days of the Great Financial Crisis was 33.1%. So yes, the pandemic era has produced a truly historic affordability crisis.

So what might fix this financing imbalance, according to Black Knight’s researchers?

“It would take a 30% drop in home prices to get back to normal affordability, or, alternatively, if prices stayed the same and rates fell to 5%, it would take 19% income growth to get us back to normal.”

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]

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