Higher Interest Rates Take More Buyers Off the Market

New NAHB 2022 Priced-Out Estimates showed that 87.5 million households are not able to afford a median priced new home, and that an additional 117,932 households would be priced out of the new home market if the price goes up by $1,000. Interest rates can also 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 $412,506 in 2022 and the recent 30-year fixed-rate mortgage rate of 3.5%, a quarter percentage point increase in the interest rate would price out approximately 1.1 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.

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. When interest rates go up from 1.75% to 2%, for example, around 1.4 million households could no longer afford buying median-priced new homes. However, at considerably higher rates this number tapers. For example, increasing from 6.25% to 6.5% mortgage rates prices out 0.86 million households. This diminishing effect happens because only a declining number households at the higher end of household income distribution will be affected.

NAHB Senior Economist Na Zhao illustrates these changes in this Eye on Housing post.