• The housing market is not likely to see significant changes if mortgage rates rise above 8%. 
• The income needed to afford a typical home would rise from about $107,000 at today’s mortgage rates to nearly $114,000 if rates hit 8%. 
• Building more homes to address the housing shortage is the only sustainable way to improve affordability and give more people access to homeownership.

Housing affordability is about as bad as it’s been during the past 15 years. Record-fast price growth during the pandemic has made saving for a down payment a bigger hurdle, and the higher mortgage rates of the past year mean the monthly payment is often a burden, as well. Mortgage rates surpassed a 22-year high this month and look like they may climb above 8% for the first time since August 2000. 

While the idea of an 8% mortgage rate is daunting and more buyers will be priced out at each new milestone, buyers are already in a tight spot and the housing market isn’t likely to look markedly different with rates above 8%. 

With a 10% down payment, someone making the median household income and buying the typical U.S. home in August would have spent almost 40% of their income on their mortgage payments. To get that down to the 30% threshold commonly used as a guideline for an affordable home, a household would need to make almost $107,000. If mortgage rates rise to 8%, that income needed to afford the typical U.S. home would rise to nearly $114,000. 

Sellers are also affected by higher mortgage rates. Most homeowners have mortgages with rates much lower than what they would get if buying another home today. That dynamic is prompting many homeowners to stay in their current home, restricting what’s available for sale and driving competition for the limited options. 

Zillow research has shown homeowners with mortgage rates below 5% are nearly twice as likely to want to hang onto their current home. The further we get from that 5% mark, the deeper the inventory deficit may become. 

It’s not clear that mortgage rates will indeed rise to 8%. The safest bet is that rates will remain volatile, and that they will stay high for the foreseeable future. Whether that means 6%, 7% or 8% is anyone’s guess, but there’s no reason to expect a significant drop anytime soon. 

There are reasons for optimism for today’s home shoppers. This year’s seasonal cooldown has come about faster than usual. More sellers are cutting their list price and fewer bidding wars are breaking out, which could present an opportunity for home shoppers with room in their budget to manage higher mortgage rates. 

Also, builders have been active and the past few months have seen the most homes under construction since at least 1970. More homes means less competition for each home, which reduces pressure on prices, and builders often have flexibility to offer creative financing options like rate buydowns to help make the math work for buyers.

While current construction and permitting data have been promising, there is still much work to be done. Ultimately, building more homes to fill the housing shortage is the only sustainable way to improve affordability and give more people access to homeownership.