Are Mortgage Rates Just a Rejection of High Home Prices?

Over the past few years, we have been completely focused on high quality mortgages.

30-year fixed rates have increased from less than 3% to nearly 8% in less than two years.

This obviously caught everyone’s attention, whether it was the media or everyday Americans.

But it often felt like home prices were being overshadowed by interest rates, despite rising and rising.

In the United States, home prices have increased by nearly 50 percent since 2019 alone, and have doubled since they stopped ten years ago.

We’re Focusing On Home Purchase Rates, But What About Home Prices?

I understand, the rise in mortgage rates was unprecedented. Although they are only up about 8% this cycle, such short-term increases are record-breaking.

For context, the 30-year fixed rate went from 3% to 8%, a 167% gain, from early 2022 to late 2023. That is a very small window of time to see such an increase.

On the other hand, the mortgage rate in the 1980s went from 9% to 18%, a 100% increase. And it took four years. They didn’t stay that high for more than a few months before falling back to the low teens.

Either way, it’s clear that mortgage rates are at the top of everyone’s minds because of this dramatic increase.

And higher prices have had real effects. Historical housing affordability it’s okay before the start of the mortgage rate, but quickly surpassed the peak of the early 2000s housing bubble late last year, per ICE (see chart below).

Affordability has since improved slightly as prices have come down, but they remain very poor and using 2008 as a benchmark is probably not smart.

But the point I’m trying to get across here is that it’s not just the prices. As I said last week, we have a subprime mortgage problem again.

Let’s Consider the Current Home for Sale Near Me

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

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

These always pique my interest because they provide a quick snapshot of the real estate market.

The property in question is being sold for around $1.7 million, which turned out to be a steep price for the property. But it’s also not an outlier considering how much prices have risen.

Redfin’s split was PITI’s monthly payment of about $11,200. That assumed a 20% down payment (only about $340k!) and a 7% mortgage rate for 30 years.

One toss in homeowner’s insurance and property taxes, and you’re looking at a nice five-figure payout. Wow!

Now I wanted to find a context to look at the properties around the topic, and I found one that was based on it and equally similar.

Sure, not as updated and thin, but still close enough for me. The current homeowners bought it in 2015 for about $750,000.

Right from the start, we are talking about a place with double value, despite supporting each other and we are very similar.

That means that the increase in PITI is more than just the maximum rate of the loan. And don’t forget the big payoff.

The same 20% down in a comparable area was just $150,000. As for PITI, only $3,700!

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

Comparing Monthly Payments on Different Mortgage Rates

Let’s ignore just the price and look at the different payments with mortgage rates.

For the 7% 30-year fixed term used by Redfin by default, the monthly PITI is $11,200. We already knew that.

But what about the 6% rate? That’s still $10,300 a month, or about three times the same amount.

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

And finally, with a rate of 4%, which is very low, PITI is still $ 8,700 per month! That’s still 135% higher than the home of com.

So, when mortgage rates have returned to near-record lows, the down payment is still very high compared to a homebuyer who bought a similar property less than a decade ago.

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

Simply put, housing prices alone have made many people unaffordable. And high loan rates are just adding insult to injury.

Do We Have a High Home Price Problem?

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

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

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

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

But that reveals another reason why housing prices are so high to begin with. There has been a severe shortage of housing supply that has existed for years in many markets across the country.

And it got worse when mortgage lending reared its ugly head. One bright spot could be rising wages, which take a bite out of rising prices.

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

Of course, housing prices and housing prices can go down together, and they may need to restore affordability.

Read on: It is no longer a matter of loan amount.

Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.

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