Original Article Date: April 20, 2022

The rise in interest rates have been the talk of the town. While interest rates are one side of the puzzle, house prices are defined by how affordable it is to purchase a home for the average person buying said home, and we have not seen much talk about it in that context.

Since there was no public level data analysis on this that we could find, we created an analysis of how interest rates interplay with home prices, and ultimately buyer affordability.

Relationship of home prices vs. interest rates:

In the first graph (mortgage rates vs. house prices): you can see as interest rates were dropping across the decades, home prices were increasing. Why is this the case? As interest rates drop, monthly payments become more affordable for buyers and hence they are able to afford 'more expensive homes’. This was particularly apparent last year, when interest rates dropped closed to 200 bps, which led to increased affordability. However, this only tells a very simplistic version of the story. The true story we need to look at is the average monthly payment as a percentage of household income.

Monthly payments vs. debt to income ratio: ‍

In the second graph, you can see the monthly payment a household would have to make if they purchased the median home at the prevailing 30 year fixed mortgage rate. Laying it on top with median household income of that time, we can see the monthly payments as a percentage of house hold income are reaching close to record levels (currently at 41%). As buyers maybe aware, the maximum debt to income ratio a household can finance is typically 44%. That means, combined with other debt service obligations, household are close to breaking point in affordability and loan qualification.

Result:

‍We are starting to see the impact of this, particularly in the high price side of the market first, where price drops are starting to occur as buyers are unable to afford these homes. The below average house price side of the market continues to remain hot as this is the only segment of the market that buyers can afford. Our prediction is that we will continue to see price drops first in higher end, and then relief going down to the middle segment later.

Curious to learn more?

‍If you are an investor curious about data driven insights and how it may impact your investing strategy, contact us at nicasastr@gmail.com