Falling Prices, Rising Incomes Boost New Home Affordability

The relative affordability of new homes being sold in the United States has improved in recent months, where rising mortgage rates, falling new home sale prices, and rising incomes has combined to produce that outcome in the national level data.

The following chart shows the history of interest rates for 30-year conventional fixed rate mortgages in the U.S. from April 1971 through October 2018.

30-Year Conventional Fixed Mortgage Rates in U.S., April 1971 through October 2018

Through October 2018, 30-year conventional mortgage rates in the U.S. have risen to 4.83%, the highest they've been since April 2011, having risen from 3.90% in October 2017.

The rising rates are making it more costly to afford the monthly payments for high-priced homes in the regions of the U.S. that have been experiencing shortage conditions, which is causing those markets to significantly slow.

According to Tendayi Kapfidze, chief economist at LendingTree, the jump in rates will eventually mean lower demand — and lower home pricing as a result.

But it's not all good news. Rising rates also equal smaller homebuying budgets — which could put a damper on those lower prices. In fact, when comparing the average mortgage payment from 2017 with what today's average rates would allow for, Kapfidze says borrowers can afford to borrow about 10% less than just one year ago.

"As most buyers budget based on monthly payments, the median buyer is now able to bid significantly less than before," Kapfidze said. "This means at each price point, the number of buyers is falling, reducing demand. This has had immediate effects on the number of houses sold and will over time reduce the pace of home price increases."

We can see some of this dynamic playing out with the raw median new home sale prices reported each month by the U.S. Census Bureau. The following chart presents those prices for each month from January 2000 through October 2018, where the data from July through October 2018 will be subject to some revision during the next several months.

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