Soaring mortgage rates might not be enough to cool housing market

Source: University of Michigan;  Chart: Axios Visuals
Source: University of Michigan; Chart: Axios Visuals

As the Federal Reserve ends its era of ultra-easy money, home mortgage rates are rising rapidly.

The big picture: It may take more than somewhat-higher mortgage rates to cool the blistering hot housing market.

  • That’s because wages are rising rapidly, offsetting some of the higher borrowing costs.

By the numbers: Imagine a simple model for how much a typical American family can afford to borrow for a house. In this family, two breadwinners each work 40 hours a week at the average hourly wage for non-supervisory workers.

  • They are only willing to pay 28% of their pre-tax income on their mortgage, a 30-year fixed rate loan at the average prevailing rate published by Freddie Mac.
  • In this model, our hypothetical family could afford to take out a $537,000 mortgage at the 4.16% cited by Freddie Mac.

That’s down from the $613,000 they could have theoretically borrowed back in August, when mortgage rates were comfortably below 3%.

  • Goal, goal, goal: It’s still above the $522,000 they could have afforded to borrow in February 2020 before the pandemic, when average hourly earnings were 12% lower.

What we’re watching: Do longer-term interest rates—which mortgage rates tend to track—continue their upward drift? Mortgage rates approached 5% as recently as 2018, which was enough to choke off home buying activity.

Go deeper: Home builder confidence in housing market is waning

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