Mortgage Rate Drop Increases Homeownership Eligibility

The average interest rate on a 30-year fixed-rate mortgage recently fell to around 6%, the lowest rate in close to three years, making homeownership possible for more people, according to the National Association of Home Builders (NAHB).

NAHB Priced-Out Estimates noted at the averaged 30-year fixed mortgage rate of 6.25%, around 31.5 million households could afford a new home at the national median home price of $413,595 per lender underwriting standards. A further 25 basis-point rate reduction from 6.25% to 6% would lower the qualifying income threshold to allow 1.42 million additional households to afford a median-priced new home.

This sizable affordability response reflects the underlying distribution of U.S. household incomes. Household incomes are heavily concentrated in the middle of the distribution, with many households near key affordability thresholds.

Around 79.8 million households earn less than $105,880, and an additional 14 million households earn between $105,881 and $132,350. When mortgage rates decline to near long-term averages (as they are now), the qualifying minimum income shifts downward into these densely populated income ranges, bringing a substantial number of households into the market. 

An equivalent 25 basis-point cut at higher interest rate levels has a smaller impact on affordability. A decline from 7.75% to 7.5% would only price around 1 million households into the market.