What Changing Prices and Rates Could Mean for You

Homebuyers have faced a daunting real estate environment with high mortgage rates and ever-increasing home prices in recent years, but a recent report from real estate brokerage Redfin lays out how the average home could get back to affordability by 2030.

Experts see mortgage rates likely sticking at their present levels, from 6% to 6.7%, through the end of next year, with data showing that many homebuyers are waiting for rates to fall before making their decision.

Redfin says that if mortgage rates come down by the end of the decade to around 5.5%, the median mortgage-payment-to-income ratio could return to “normal” levels by 2030 or sooner.

What Does ‘Normal’ Mean Anyway?

A long-standing rule of thumb is that a home is affordable when you are able to keep housing costs like rent or a mortgage plus associated costs to 30% or less of your gross income.

In its report, Redfin used July 2018 as its point of comparison for a “normal” level of affordability in the housing market. At the time, mortgage rates were just above 4%, the number of buyers and sellers was close to equal, home prices were rising but not too quickly, and the median monthly mortgage-payment-to-income ratio had just hit the 30% recommended ceiling.

To sketch out the next few years, Redfin wanted to see what would have to happen if housing costs were to reach that 30% mark again, and how they could get there.

The Timeline for Housing Affordability

“The path back to normal housing costs doesn’t require a crash in home prices—stability may be enough,” Redfin senior economist Asad Khan said. “Buyers shouldn’t expect affordability to snap back overnight, but the trend lines point to real progress within this decade. If mortgage rates decline modestly, and price and income growth hold steady, the market for homebuyers could feel much different by the late 2020s.”

The report assumed that household incomes would continue to rise, and that mortgage rates could either remain at their current level, which Redfin put at 6.7% on average over the last three months, or fall to a more affordable level of around 5.5%. With those two mortgage rate scenarios, Redfin laid out when housing would become affordable if home prices fell by 2%, stayed flat, kept rising at their current 1.4% rate, or rose by 2%.

At a 5.5% mortgage rate, Redfin said that the median home could be affordable by:

• November 2027—if home prices fall
• January 2029—if they remain flat
• November 2030—if they continue growing at their current rate

And if home prices grow faster than they are now, it won’t be until July 2032 when the median home could be affordable at that interest rate.

At recent mortgage rates of about 6.7%, however, the report found that housing wouldn’t be affordable until August 2029, September 2031, and December 2034, respectively. In addition, the return to affordability might not happen if mortgage rates stay this high and home prices continue to rise faster than they have been.

The Cities That Are Lagging Behind

Redfin projected that housing costs in just 16 of the top 50 largest metro areas will return to their 2018 “normal” affordability levels by 2030, assuming 5.5% mortgage rates, as well as current home prices and income growth. However, that would drop to just 11 of the top 50 if mortgage rates stay at their recent 6.7% level.

In San Francisco, housing affordability has already returned to 2018 levels, but that level is nowhere near the 30% standard. With a median home price of $1.5 million, the median household would have to spend two-thirds of its gross income to afford it.

However, housing in more than half of the top 50 U.S. metros still wouldn’t reach 2018 levels of affordability even if mortgage rates fell to 5.5%, while home prices and income growth were constant. That group includes Midwest and East Coast cities where prices have grown quickly in recent months, like Boston, Chicago, Minneapolis, and Cleveland.

The Bottom Line

Housing affordability is unlikely to snap back overnight, but the trends suggest progress is possible by the end of the decade. If incomes keep rising and mortgage rates ease modestly, the typical U.S. home could feel more affordable again by 2030. For buyers, the lesson is that timing and location will be crucial, since many big-city markets may lag years behind the national average.