Here's Just How Much Housing Affordability Has Been Impacted by Interest Rates

You may be surprised how big of an impact rising rates have had.

During the COVID-19 pandemic, mortgage rates repeatedly hit record lows. In fact, according to Freddie Mac, the weekly average mortgage rate was 2.65% for a 30-year fixed-rate mortgage during the week ending Jan. 7, 2021. This is lower than rates have ever been since Freddie Mac began its reporting.

This trend began to reverse as the pandemic waned, though. In fact, as the Federal Reserve began raising interest rates to try to combat the inflation that began surging as post-pandemic demand soared, rates have crept up dramatically. As of the week ending March 2, 2023, Freddie Mac reported that the average rate for a 30-year fixed-rate loan was 6.65%.

This is obviously a dramatic increase, but just how much has it impacted housing affordability? Here's what you need to know if you're thinking about buying a house and want insight into how mortgage rates will impact your costs.

Here's how housing affordability has been affected by rising rates

Data from Redfin shows the impact that this dramatic increase in mortgage rates has had on home affordability.

According to Redfin's market insights, a home buyer who is able to afford to make a monthly payment of $2,500 could afford to purchase a $384,000 home at the current mortgage rates available in 2023 (6.5% at the time Redfin analyzed the data).

By contrast, if a buyer was purchasing a home at 3% -- a common rate in 2021 -- that same buyer would have been able to buy a $518,000 property with that same monthly payment. Monthly payments have gone up so dramatically due to the increase in rates. Buyers are also finding themselves unable to qualify for loans they may have before, since the higher monthly payments push up their debt-to-income ratios (this is the ratio of housing costs and other debt payments relative to earnings, which most lenders put a cap on).

Now, home prices did surge during the early stages of the pandemic -- in part spurred on by record low mortgage rates increasing demand at the same time as the number of homes for sale declined and reduced supply. And, in some markets, there's evidence prices are returning to normal -- so, it may be possible for home buyers to find less expensive houses now that they can still afford, even at today's higher rates.

But, the bottom line is, a dramatic increase in interest rates is going to have a huge effect on monthly interest costs and thus on the amount that home buyers can afford to pay for properties.

Should you wait to buy a house due to high interest rates?

It's tempting to think you should wait it out and not buy a house until interest rates fall. But, the reality is, rates are still reasonable by historic standards if you look at the entire history of mortgage rates. It's also impossible to know when rates will actually decline or what will happen to the housing market at that time. You could wait years to purchase a property and property values could go up in the meantime, so you may not end up better off even if you can get a lower rate later.

You also have the option to refinance your mortgage if rates do fall, so it's not like you're locked into your current high rate forever if you get a mortgage now.

Ultimately, if you are in a good financial position to purchase a property now and you can buy one you like while keeping your housing costs below about 25% to 30% of your take-home pay, then there's no reason not to move forward, even though rates have made monthly payments less affordable than they were a few short years ago.