Adobe Stock

With the prevailing 30-year fixed-rate mortgage of approximately 7.25%, only 27.5 million of 134.7 million U.S. households can afford to buy the median-priced home, according to an analysis by the NAHB. At interest rates of 6.25%—last seen in mid-February 2023—4.5 million additional households would be able to afford a home.

This change is particularly relevant, as NAHB is currently projecting that the average mortgage rate will be near 6.25% by the end of 2024—although there is considerable uncertainty around this number, due largely to uncertainty about what monetary policy the Federal Reserve will find necessary to contain inflation. Readers can refer back to the above table to track the impact actual changes in mortgage rates are having on affordability of new homes over the rest of the year.

As many analysts have noted, interest rates and house prices interact with each other to determine new home affordability. For example, if the costs of producing homes and the resulting prices to buyers were reduced (for instance, by adopting some of the measures in NAHB’s 10-point plan to lower shelter inflation), more than 4.5 million households would be priced into the market by reducing interest rates from 7.25% to 6.25%.

Similarly, if interest rates were lower, a larger number of households would be priced into the market by a given reduction in house prices. This occurs because at lower prices or interest rates, the starting point is in a denser part of the U.S. income distribution, where there are more households to be priced into (or out of) the market. This point will be illustrated graphically in a forthcoming post on NAHB’s 2024 housing affordability pyramid.

Read More