While many first-time homebuyers in today’s market struggle to afford a down payment on a home, one of the long-term affordability issues revolves around monthly payments due to rising mortgage rates. Current 30-year mortgage rates are 7.18%, according to Freddie Mac, a far cry from the sub-3% interest rates we saw during the early days of the pandemic.
Rising mortgage rates result in higher monthly costs for new buyers. According to real estate data and analytics firm Black Knight, monthly payments have increased 60% (or $871) year over year. The average monthly principal and interest payment for borrowers on a 30-year fixed rate loan was more than $2,300 in July 2023, which is the highest average principal and interest payment ever, according to Black Knight.
Now more than half of homebuyers face a monthly mortgage payment of at least $2,000, while a quarter pay $3,000 or more, Black Knight data shows. Meanwhile, the average U.S. monthly income was just $4,600 in July 2023, according to economic data firm CEIC. That means some homeowners can spend more than 60% of their wages on their mortgage.
Keep in mind that principal and interest are before deductions for expenses such as property taxes and insurance.
“When did the $2,000 monthly mortgage payment become the norm?” asks Andy Walden, Black Knight vice president of enterprise research, in the report. “Nearly one in four July homebuyers have payments of more than $3,000, up from just 5% in 2021. We have been talking about affordability for some time, but this puts the situation in stark relief.”
Based on current mortgage rates, average income levels and home prices, most first-time homebuyers using a “minimum” down payment could spend more than 40% of their monthly income on housing, says Buck Horne, director of equity research. Residential and residential REITs at Fortune 500 investment bank Raymond James.
“All else being equal, that figure certainly seems unsustainable when you look at long-term averages closer to 30%,” Horne says. Fortune.
Higher monthly costs can be a challenge, especially for first-time buyers in the housing market. The average monthly renter household income is $3,900, says Mark Fleming, chief economist at Fortune 500 financial services firm First American. Fortune. That implies that a $2,000 principal and interest payment would represent 51% of the potential homebuyer’s monthly budget, he adds.
“That is generally considered a high burden, and one of the reasons why we estimate affordability is at its lowest level in 30 years,” says Fleming. “The combination of higher rates and continued price increases has made affordability a real challenge for first-time homebuyers.”
Ultimately, some of the factors keeping buyers (not necessarily new homeowners) in the market include families offering financial assistance for a down payment and buyers using “significant” equity in existing homes to secure a mortgage on a new home. compensate, says Horne.
With housing affordability largely challenged by the Fed’s mortgage rate increases, it’s almost impossible to predict when potential homeowners might get some relief.
“Until the Fed clearly finishes raising rates, there will be upward pressure on mortgage rates,” Fleming said. “But given the historically rapid and assertive shift to tighter monetary policy that we have just witnessed, it is likely that most of the adjustment in mortgage rates has already taken place.”
Overall, rising mortgage rates – coupled with tight housing inventory and pent-up demand – will likely put pressure on first-time buyers for a while.
“Any relief in mortgage rates will likely be absorbed by even higher house prices,” Horne added. “So until something more fundamental breaks within the larger economy and disrupts household balance sheets, current levels of mortgage payments could be the new normal for the foreseeable future.”
This story originally appeared on Fortune.com
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