Soaring mortgage rates may not be enough to cool the housing market

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

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

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

  • This is 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 home. In this family, two breadwinners each work 40 hours a week at the average hourly wage for non-executives.

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

It is downstairs of the $613,000 they could theoretically have borrowed in August, when mortgage rates were comfortably below 3%.

  • But, but, but: That’s still above the $522,000 they could have afforded to borrow in February 2020 before the pandemic, when the average hourly wage was 12% lower.

What we are looking at: Are longer-term interest rates — which mortgage rates tend to follow — continuing to drift higher? Mortgage rates approached 5% as recently as 2018, which was enough to stifle home buying activity.

Go further: Homebuilders’ confidence in the housing market is down

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