Homebuyer affordability worsened in October as higher mortgage rates pushed the monthly payment to record highs.
The national median monthly payment increased 3.7% to $2,012 in October from $1,941 in September, according to the Mortgage Bankers Association (MBA), marking a new high for the survey. That’s also equal to a 45.5% year-over-year increase, increasing the average monthly mortgage payment by $629 in the first 10 months of the year.
The figures underscore the challenging conditions many would-be buyers have faced this year as higher rates, elevated home prices, and inflation put homeownership out of reach.
“Higher mortgage rates are also squeezing the purchasing power of prospective buyers," Edward Seiler, MBA’s associate vice president, housing economics, and executive director, Research Institute for Housing America, said in a news statement. "The median loan amount last month decreased to $295,000 – the lowest level since January 2021."
Higher rates erode purchasing power
The sharp increase in monthly mortgage payments in October came after mortgage rates topped 7%, according to Freddie Mac, reaching its highest point since April 2002. At that point, rates were up nearly 4 percentage points since the start of the year, the largest year-to-date increase in over 50 years.
The dramatic increase in rates – driven by the Federal Reserve’s aggressive fight on inflation – crushed homebuyer demand to its lowest point in 25 years in October, the MBA cited, with purchase activity down 46% from a year ago. Sales of previously owned homes have fallen for nine consecutive months, down 28.4% year over year in October.
According to Seiler, affordability challenges have been a speed bump in the housing market.
“Weakening affordability and increased economic uncertainty are expected to slow home buying activity in the final two months of the year,” he said.
According to the MBA’s Purchase Applications Payment Index (PAPI), which measures affordability conditions, the national PAPI reading increased to 167.9 in October from 163.6 in September, indicating that affordability levels worsened for would-be buyers. The index surpassed the previous high of 164.2 set in May 2022 and stands 38.1% higher than a year ago.
For borrowers applying for lower-payment mortgages (the 25th percentile), the national mortgage payment increased to $1,323 in October from $1,271 in September.
“First-time buyers are the most impacted in terms of affordability,” Taylor Marr, deputy chief economist at Redfin, told Yahoo Money. “They just cannot afford very much, given how high home prices are.”
Those in the market to purchase turned to government-backed loans, which often carry lower interest rates than conventional loans, to soften the impact of higher borrowing costs. Still, monthly payments for those loans also increased during the month.
The national median mortgage payment for Federal Housing Administration (FHA) loan applicants was $1,666 in October, up from $1,566 in September and $1,056 a year ago. By contrast, borrowers applying for a conventional loan faced a monthly mortgage payment of $2,047, the MBA reported, up from $2,003 in September and $1,431 a year prior.
“The impact on a families budget is significant,” George Ratiu, senior economist and manager of economic research for Realtor.com, told Yahoo Money.
Homebuyer affordability dips across the U.S.
Borrowers in Nevada faced the toughest affordability conditions with its PAPI index coming in at 279.7, followed by Idaho (269.7), Arizona (241.7), Washington (219.7), and Utah (218.9).
Borrower affordability conditions were best in Alaska (113.6), Washington D.C. (114.2), West Virginia (115.1), Connecticut (120.9), and Louisiana (125.6).
Homebuyer affordability also worsened across demographics, with Black and white households' affordability deteriorating the most, followed by Hispanic households.
“The record low interest rates that we’ve seen over the last two and a half years have really allowed home price growth to outpace income growth,” Andy Walden, vice president of enterprise research and strategy at Black Knight, told Yahoo Money. “Now all of a sudden when interest rates are rising back towards their long-term norms, affordability is out of balance.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.