Small Increase in Mortgage Rates Has a Huge Negative Impact on Affording a Home
Just a 1% increase in interest rates significantly reduces what price house a home buyer can afford. And right now interest rates are rising quickly.
This is especially the case in a town such as Andover where the median sales price was over a million dollars in Q2 of this year. In the past 6 months average 30-year fixed mortgage rates have climbed from 5% to 7%. When interest rates increase at that rate, the home price that a household earning $150,000 could afford to buy drops from just about $750,000 to about $550,000. That means that as interest rates and housing prices rise, fewer and fewer Andover homes are affordable for folks earning the area median income.
Housing affordability is driven by many factors, but two key inputs are Sales Prices and Mortgage Rates.
The average rate on 30-year mortgages rose to just over 7% at the end of October 2022, according to the Federal Reserve Bank of St. Louis.
The table below shows the impact of interest rates and home prices on a typical middle income buyer in Andover over the last two years. This example uses a 10% down payment, 2% closing costs, a 30-year fixed rate mortgage and a median income of $153,315.
This graph shows that with a mortgage rate increase from 5% to 8%, the home price that a household earning $150,000 could afford to buy drops from just about $750,000 to just over $500,000.
