How falling mortgage rates could impact housing affordability this year

Mortgage rates hit the lowest level in more than a year, which is a little like putting the cart before the horse, but lenders know the horse is coming. That horse is the Federal Reserve cutting interest rates, which experts believe will happen in September.

What will all of this mean for housing affordability? Watch the video above to see the data behind the story.

Why mortgage rates are falling

Mortgage rates are falling in anticipation that the Fed will lower the Fed funds rate, the interest rate banks are charged for overnight lending. It basically acts like a benchmark for all other consumer borrowing. 

When the Fed went on this rate hike campaign to make borrowing more expensive and slow down inflation, mortgage rates jacked up and the dream of buying a home quickly got out of reach for many Americans.

Peak mortgage rates are coming off the cliff but don’t expect those historically low interest rates from the height of the pandemic. When analyzing decades of data, today’s mortgage rates aren’t that high historically. Before 2000, these rates would have been a steal. Today, they’re uncomfortably high thanks to another factor: Home prices.

Home prices off peak but by how much?

If only we’d all had the foresight and means to buy a home when it felt like the world was coming to an end in the spring of 2020. Back then, the median sales price of a home in the U.S. was $317,000.

After setting record highs in 2022 at around $443,000, home prices are going back down, but at $412,000, can that be considered affordable? It depends on how short your memory is. 

The median sales price is nearly $100,000 more than it was five years ago, and it’s double what it was 15 years ago during the depths of the Great Recession. 

Rising inventory could help

Since there are no credible signs the housing market is about to crash, lowering interest rates and lower prices are good enough signs for more movement in the housing market, and we’re seeing that with rising inventory. 

The active listings are back up to levels not seen since early COVID-19 days. More houses on the market means more competition on the selling side, which could be the first win for buyers in a while. But experts don’t expect prices to decrease all that much, because inventory is still so much lower than what’s needed. 

The typical family still can’t afford the typical home

That brings us to housing affordability and whether the typical family earns enough to qualify for a mortgage on a typical loan. For most of the past year, that answer has been no. 

The National Association of Realtors measures this using price, income and mortgage data, assuming a 20% down payment. An index amount above 100 means the typical family can afford the typical home loan. A value below 100 means the typical family with the median household income will not qualify for a loan on the median-priced home.

From April-June 2024, the index has been below 100, meaning it’s unaffordable. At last measurement, the index sits at 93.3, which means the median family income is 93.3% of what’s needed to qualify for the loan.

Where in the country houses are still affordable

The Midwest is the only place in the country today where the typical family can afford the typical home. In the Midwest, the qualifying income for the typical loan is around $84,000 while the median family income exceeds $100,000.

But the secret is getting out. Realtor.com says Columbus, Ohio, is the most popular housing market in the country this year. And there’s not a single housing market on the list west of the Mississippi River. 

In the West, the qualifying income is nearly double that of the Midwest at $164,208. The median family income is $112,609. In the West, the affordability index is a staggering 68.6.