Introduction
The U.S. housing market has undergone a remarkable transformation since 2019. Home prices surged, influenced by a combination of low interest rates during the pandemic, high demand, limited inventory, and economic volatility. By 2024, many potential homeowners are asking: When will housing become affordable again? To answer this, we must consider how interest rates and home prices interact, and what rates are needed to restore housing affordability to pre-2019 levels.
Home Prices from 2019 to 2024: A Brief Overview
In early 2019, the median home price in the U.S. hovered around $250,000, with interest rates averaging around 4%. These conditions allowed for relatively affordable monthly payments for most middle-class families.
However, the COVID-19 pandemic spurred a housing boom. By mid-2021, home prices saw an increase of over 20% in many regions, driven by low-interest rates (below 3% for 30-year fixed mortgages) and a rush for larger homes as people adjusted to remote work. The median price rose to approximately $375,000 by 2021.
Fast forward to 2023-2024, with inflation concerns and Fed policies driving interest rates back up, mortgage rates climbed past 7%, while home prices plateaued at historically high levels near $400,000. This combination has created a perfect storm for affordability issues, squeezing first-time homebuyers out of the market and making homes significantly more expensive compared to pre-2019 levels.
The Affordability Equation
Affordability in housing is often defined by the monthly mortgage payment as a percentage of the buyer’s income. In 2019, with home prices averaging $250,000 and interest rates at 4%, monthly mortgage payments for a 30-year loan (with 20% down) were around $955, assuming no taxes or insurance. At the same time, the median household income was about $63,000, meaning the average monthly mortgage payment was about 18% of household income.
In contrast, in 2024, with home prices averaging $400,000 and interest rates at 7%, monthly mortgage payments are nearly $2,131, or over 40% of the median household income, now around $70,000. This massive increase has significantly altered what is considered an affordable home.
Early Results from the Model
Preliminary calculations suggest that, with home prices remaining at $400,000, interest rates would need to fall to around 3-4% to make homes affordable again, assuming the median income does not significantly increase. At this lower interest rate, monthly payments would become more manageable for the average household. If home prices were to decrease, even higher interest rates might still achieve affordability.
Conclusion
Restoring housing affordability to pre-2019 levels is a complex challenge that requires more than just interest rate adjustments. Income growth, housing supply, and economic stability all play roles in the affordability equation. However, our model suggests that, given current price levels, interest rates would need to fall to around 3-4% for many buyers to regain the ability to purchase homes at a rate comparable to pre-2019 conditions.
As we look to the future, the interplay between mortgage rates and home prices will be key in determining whether housing affordability can be restored. For now, buyers and sellers alike will need to closely watch economic conditions and Fed policies, as these factors will likely dictate the next phase of the housing market.