Home Affordability Used to Predict Home Values & Mortgage Rates

As mortgage interest rates push 16-year highs, we have asked if the current level of rates is a solid reason to justify new homebuyers stepping into the market.

We all have seen social posts that compare today’s interest rate environment to the past 40 years, making today’s rate look reasonable. This approach, however, is only telling ½ of the story. The problem comes down to overall housing affordability, which also considers the current value of homes being sold. If home values were at 2018 levels, a 6.375% rate could still be considered affordable. However, after many markets have increased by 30% or more over this time period, affordability at a 6.375% mortgage rate can be a problem.

 

Predicting both mortgage interest rates & home values

One of the strongest forward indicators I use when trying to predict both mortgage interest rates and home values in the future is the amount of monthly gross income the median family needs to spend on their house payment to purchase a median-priced home.

When this number exceeds 25% for an extended period of time, I know there is a high probability that interest rates and / or home values need to decline. At the current time, there are some areas in our nation where this ratio is exceeding 35%. This is not a sustainable rate and will likely lead to lower home values and or lower mortgage rates in the future. Let’s hope for lower mortgage rates and stable home values.

Tomorrow’s Bureau of Labor Statistics (BLS) report will likely set the near-term direction for mortgage interest rates. This generally creates an increased level of volatility as market participants wager which direction the labor market is heading. The Fed is hoping to see the labor market shrink. A low number will help push the argument for a Fed Pivot sooner than anticipated.

The safe play will be to lock in advance of the report.

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