Those holding out hope for a housing crash are setting themselves up for disappointment.
American home prices would need to plunge nearly a third to make today’s punishing mortgage rates as affordable as the loans millions of existing homeowners are sitting on.
The median US home sold for $429,100 in August, but at today’s mortgage rates, that price would have to tumble 32% to about $291,181 for a new buyer’s monthly payment to match that of the typical current mortgage holder, according to a new Barron’s analysis.
To put that staggering figure in perspective, US home prices fell about 27.5% from their 2006 peak through September 2010 amid the housing crash and financial crisis, according to Federal Reserve data — meaning a 32% plunge would be even worse.
Nadia Evangelou, director of research at the National Association of Realtors, told Barron’s she doesn’t expect prices to fall by anything close to that amount.
The brutal math illustrates just how dramatically the surge in borrowing costs has reshaped the housing market — and why homeowners who locked in rock-bottom rates during the pandemic have so little incentive to move.
The typical existing mortgage holder has a 3.88% rate and pays $1,597 a month, according to ICE Mortgage Technology data cited by Barron’s.
But mortgage rates have recently surged to around 7.3%.
At that rate, a buyer putting 20% down on the $429,100 median-priced home would face a monthly principal-and-interest payment of about $2,353 on a 30-year mortgage, Barron’s calculated.
That’s $756 more every month — or roughly 47% higher — than the median payment shouldered by current mortgage holders.
To get that payment back down to $1,597 without a drop in rates, the home’s price would need to sink to roughly $291,181.
The enormous gap helps explain the so-called mortgage-rate lock-in effect that has dogged the housing market since borrowing costs began climbing.
Millions of Americans refinanced or purchased homes when mortgage rates plunged during 2020 and 2021. Those loans have become increasingly valuable as prevailing rates have more than doubled.
Rick Palacios Jr., director of research at John Burns Research & Consulting, described those ultralow pandemic-era mortgages as becoming a “generational scourge” as they discourage homeowners from putting their properties on the market.
The result has been a stubborn shortage of existing homes for sale in many parts of the country, even as would-be buyers struggle with a combination of elevated prices and borrowing costs.
And homeowners hoping that mortgage rates will simply return to pandemic-era levels may be waiting a while.
Persistent inflation and elevated bond yields offer little reason to expect a dramatic decline in mortgage rates in the near term, according to Barron’s.
A 32% collapse in home prices isn’t the expected solution, either.
Evangelou says affordability is more likely to improve gradually through some combination of lower mortgage rates, rising incomes and slower home-price growth.
Homeowners do have one major financial advantage: enormous amounts of accumulated equity.
US mortgage holders collectively have a record $17.9 trillion in home equity, according to property-data firm Cotality, amounting to an average of about $310,000 per homeowner.
But even that wealth doesn’t necessarily solve the problem for someone trying to trade one home for another.
“Having record equity doesn’t necessarily help that much, because everyone else has record equity, too,” Cotality principal economist Thom Malone told Barron’s.
And homeowners can’t always wait for the housing math to improve.
Divorce, job changes, growing families and retirement continue to force people to move regardless of where mortgage rates stand, Malone noted.
For those homeowners, giving up a 3% or 4% mortgage for a new loan above 7% can make the next house dramatically more expensive — even if its sticker price isn’t much higher than the home they leave behind.
For prospective first-time buyers trying to get skin in the game, the figures prove even more brutal.
