You need to make a whopping $148K per year just to afford a $500K house as mortgage rates surge to highest level since November

Average mortgage rates jumped to 6.79% this past week as the U.S. debt ceiling deal cleared the House.

“Although there has been a steady flow of purchase demand around rates in the low- to mid-6% range, that demand is likely to weaken as rates approach 7%,” says Freddie Mac chief economist Sam Khater. Not everyone can afford to buy as rates rise.

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Say you’re buying a $500,000 home. Assuming you have a 10% down payment of $50,000 and lock in a 30-year fixed-rate mortgage at 6.79%, your monthly payment will add up to about $3,700.

Considering that most lenders want you to keep your housing expenses at or under 30% of your gross income, you’d need to earn at least $148,000 a year to afford that $500,000 home.

30-year fixed-rate mortgages

The average 30-year fixed rate jumped to 6.79% this week, according to the latest data from Freddie Mac, compared to last week’s average of 6.57%. A year ago at this time, the rate averaged 5.09%.

“With rates closer to the 7% benchmark, nearly 5.5 million households continue to be priced out of the market compared to a year ago,” says Nadia Evangelou, senior economist at the National Association of Realtors.

“Although there are fewer buyers, more than one-third of properties are sold above their list price due to limited inventory, especially of homes that first-time buyers can afford to buy.”

15-year fixed-rate mortgages

The average rate on a 15-year home loan also climbed from 5.97% to 6.18% this week. This time a year ago, the 15-year fixed-rate averaged 4.32%.

The national median list price also grew to $441,000 in May, up from $430,000 in April, according to a report from Realtor.com.

“Higher mortgage rates and home prices compared to May of last year increased the monthly cost of financing 80% of the typical home by roughly $280.96 (+15.5%) compared to a year ago,” says the report.

However, while this figure still exceeds recent rent growth and inflation, it’s under last month’s growth rate of 19%.

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Investor home purchases plunged a record 49%

Spooked by elevated interest rates and decreasing rent and housing values, real estate investors purchased 48.6% fewer homes in the first quarter of 2023 than they did last year — marking the biggest annual drop on record — according to a report by Redfin.

Although the report notes many investors buy homes with cash, they’re often hit by high interest rates when they take out loans to cover renovations and other expenses.

That said, investors are “still scooping up a bigger share of homes than they were before the pandemic, which can create challenges for individual buyers at a time when there are so few homes for sale,” says Redfin senior economist Sheharyar Bokhari.

“Investors have gravitated toward more affordable properties due to still-high housing costs and rising mortgage rates, which has left first-time homebuyers with fewer starter homes to choose from.”

Mortgage applications remain on a downward trend

Demand for mortgages fell 3.7% from last week, according to the Mortgage Bankers Association (MBA).

“Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon,” says Mike Fratantoni, senior vice president and chief economist at the MBA.

He notes some lenders were quoting mortgage rates above 7% on 30-year loans last week.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.