Are mortgage rates just a distraction from rising home prices?

For the past several years, we have been entirely focused on rising mortgage rates.

The 30-year fixed yield has risen from levels of less than 3% to about 8% in a period of less than two years.

Obviously, this has caught everyone’s attention, whether it’s the media or ordinary Americans.

But there has often been a feeling that house prices have been overshadowed by interest rates, even though they are also rising.

In the United States, home prices have risen by about 50% since 2019 alone, essentially doubling since bottoming out a decade ago.

We focus on mortgage rates, but what about home prices?

I understand that the rise in mortgage rates has been unprecedented. While it has risen to only about 8% this cycle, the increase in such a short period is record-breaking.

For context, the 30-year fixed yield rose from about 3% to 8%, representing a 167% increase, from early 2022 to late 2023. That’s a very small window of time to see such an increase.

In contrast, mortgage rates in the 1980s rose from 9% to 18%, an increase of only 100%. It took four years. They did not stay at this high level for more than a few months before falling back to the low teens.

Either way, it’s clear that mortgage rates have been at the forefront of everyone’s minds due to this spike.

The rise in rates has had real effects. Housing affordability has been historically poor Okay Before mortgage interest rates rose, but they quickly passed the peak of the housing bubble of the early 2000s late last year, per Ice (See chart below).

Affordability has improved a bit since then as rates have fallen, but it is still very poor and using 2008 as a benchmark is probably not wise.

But the point I’m trying to get at here is that it’s not just about prices. As I mentioned last week, we also have the problem of high loan amounts.

Let’s consider a home that is currently for sale near me

I got the idea for this post after receiving a text about a house for sale nearby.

It was one of those unsolicited text messages from a real estate agent advertising his listing.

These things always interest me because they quickly warm up the housing market.

The property in question is selling for about $1.7 million, which immediately seemed expensive for the area. But it’s also not unusual given how high the prices are.

The breakout on Redfin was a monthly PITI payment of about $11,200. This assumes a 20% down payment (only about $340,000!) and a fixed mortgage rate of 7% for 30 years.

If you throw in homeowners insurance and property taxes, you’re looking at a very hefty five-figure payment. Oh!

Now I wanted to get context, so I looked at properties close to the topic, and found a property supported by it that was somewhat similar.

Sure, it’s not as up-to-date and a little smaller, but it’s still close enough for me. The current homeowners purchased it in 2015 for about $750,000.

Right off the bat, we’re talking about a double-priced property, despite supporting each other and being fairly similar.

This means that the increase in PITI goes beyond just a rise in the mortgage rate. Don’t forget the huge down payment, too.

The same 20% discount on the identical property was only $150,000. As for PITI, it’s only $3,700!

That’s a difference of $7,500, or an increase of 200%!

Compare monthly payments across different mortgage rates

Let’s ignore the fact that the rate is the price and look at the different payments at different mortgage rates.

At the 7% fixed rate for 30 years that Redfin uses by default, the monthly PITI is $11,200. We already knew that.

But what about the 6% rate? That’s still a whopping $10,300 a month, or nearly three times as much as a comparable property.

At 5% we get a monthly housing payment of $9,450. At least it’s not double digits anymore, right?

Finally, at 4%, which is a very low rate, the PITI amount is still $8,700 per month! This is still 135% higher than the corporate house.

So, if mortgage rates return to near-record lows, the payment is still pretty astronomical compared to a home buyer who purchased a similar property less than a decade ago.

If you want to say hey, it’s been almost 10 years, that’s an unfair comparison. I see similar properties purchased in 2017, 2018, 2019 for around $850,000 or $900,000.

Simply put, housing prices alone have put affordability out of reach for many. Higher mortgage rates are just an insult to injury.

Are we facing the problem of rising house prices?

As shown, even a 4% mortgage rate does not lower mortgage payments enough to make purchasing a home affordable for many.

Paying nearly $9,000 a month while your neighbor pays $3,700 seems absolutely ridiculous.

So the next most obvious place to look is house prices. But we know that house prices are stable and rarely fall, at least on a nominal (non-inflation-adjusted) basis.

This means that it is difficult to get much relief there unless there is a significant increase in supply, which could lead to lower prices.

But this raises the other reason why housing prices are rising in the first place. There has been a severe shortage of existing homes for years in many markets nationwide.

It got worse when mortgage rate fixing reared its ugly head. Perhaps the only bright spot is rising wages, which somewhat dampens the price increase.

However, it is not enough in itself. You need all three components to restore affordability, including rates, prices, and wages.

Mortgage rates and home prices can certainly fall together, and may need to in order to regain affordability.

Read on: It is no longer a mortgage rate story.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.

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