For potential homebuyers, a 25-basis-point rate hike could exclude more than 1M buyers from buying a median-priced new home.

Affordability vs. Inflation

The Federal Reserve is walking a fine line when it comes to homebuyer affordability and rising inflation.

The National Association of Home Builders (NAHB) indicated that raising interest rates at a 25-basis-point rate hike on top of record-breaking home price hikes would essentially eliminate more than 1M potential buyers of a median priced newly built home.


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Na Zhao, senior economist with NAHB, has written, “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.”

Effects of Rising Rates

With new-home building material costs being up +21% y/y, Robert Dietz, chief economist with the NAHB, said, “Higher mortgage rates combined with rising construction costs and a lack of construction workers will increase affordability headwinds in the year ahead.”

Based on an estimated 2022 new-home median price of $412,505, the NAHB indicated that the effect of raising the 30-year interest rate from 3.5% (monthly payment of $1,822 and qualifying income of $99,204) to 3.75% monthly payment of $1,877 and qualifying income of $101,548) would exclude +1.1M buyers.

Let’s keep going from there…take a look at the NAHB’s number of eligible households by interest rate based on the median new-home price of $412,505:

  • 3.5% – 39.2M eligible household borrowers
  • 3.75% – 38.1M eligible household borrowers
  • 4% – 36.9M eligible household borrowers
  • 4.25% – 35.7M eligible household borrowers
  • 4.50% – 34.5M eligible household borrowers
  • 4.75% – 33.3M eligible household borrowers
  • 5% – 32.1M eligible household borrowers

Cause and Effect of Rising Interest Rates Predictions

A couple of weeks ago, the Mortgage Bankers Association predicted that interest rates may increase to 4.3% by the end of 2022 and 4.5% in 2023.

The NAHB reacted to this MBA prediction by indicating that a +0.25% interest rate hike from 4.25% to 4.5% would require an income level of at least $108,782 to buy a median priced new home.  $108,782 is substantially more than the required income level of $101,548 needed for an interest rate of 3.75%.

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