NYC Home Affordability Worsens as Mortgage Rates Exceed 7%

The New York metropolitan area has become the fifth-hardest region in the U.S. for first-time homebuyers, according to new research from Achieve. This difficulty is exacerbated by the average 30-year fixed mortgage rate climbing back above 7%, presenting an additional obstacle for prospective homeowners already grappling with elevated home prices and a persistent shortage of available properties.

An entry-level home in the New York metro area is priced at approximately $489,359. With a median household income of $99,155, a household would need to earn an estimated $114,380 annually to comfortably afford such a home, assuming a 10% down payment and mortgage payments capped at 30% of gross income. This required income represents a 15.4% increase over the typical household's earnings.

Appraiser Jonathan Miller of StreetMatrix noted that the limited inventory of homes for sale is a more significant factor in affordability than interest rates themselves. Typically, a surge in borrowing costs would lead to decreased sales, increased inventory, and softer prices. However, in the current market, prices continue to rise despite higher mortgage rates due to this inventory constraint. "Mortgage rates are over 7%, and prices are still rising, right? That’s not logical to many people," Miller said. "But the reason it’s not logical is because the limited inventory is distorting everything."

The market is also affected by a "lock-in effect," where millions of homeowners who secured mortgages at lower rates in previous years are hesitant to sell and take on a new, higher-rate mortgage. This reluctance to move further restricts the supply of homes on the market.

Buyers are experiencing pressure from multiple sides, according to Jessica Peters of Douglas Elliman. "Borrowing costs remain elevated, but New York home prices have remained resilient, particularly in desirable neighborhoods where inventory is limited," Peters stated. In addition to mortgage payments, New Yorkers must also contend with maintenance fees or common charges, taxes, and closing costs, which contribute to substantial monthly carrying expenses.

In response, some buyers are adjusting their strategies by increasing down payments, lowering their budget expectations, exploring different neighborhoods, or opting for smaller apartments or co-ops. However, buyers with less available cash have fewer choices. First-time buyers who rely more heavily on financing are particularly sensitive to mortgage rate fluctuations.

The market divide is evident in Manhattan, where the higher end of the market is performing better than the lower end. Donald Brennan, broker/owner of Engel & Völkers New York City, Brownstone Brooklyn, North Fork and Hoboken, observed that his firm's New York City clients are predominantly cash buyers, a shift from a more balanced mix of cash and financed buyers in the past.

While waiting for lower mortgage rates might seem like a solution for struggling buyers, experts caution that it may not fully resolve affordability issues. A decrease in rates could also stimulate demand in a market with still-scarce inventory, potentially driving prices up further. Meaningful improvement in affordability requires both lower financing costs and a broader selection of housing options at various price points.

Realtor.com senior economist Jake Krimmel advises buyers to prepare for rate fluctuations, suggesting budgets should accommodate potential shifts of around 50 basis points. The strategy of "buy now, refinance later" is also less certain today, as conditions favoring significant future rate drops are not as apparent.

Experts predict that inflationary pressures, the federal deficit, and geopolitical uncertainties may keep mortgage rates in a "higher for longer" environment for several years. This prolonged period of uncertainty in the housing market leaves potential buyers in a challenging position.

The impact of higher mortgage rates extends beyond the purchase market, influencing rental prices as well. Individuals unable to afford buying may remain renters longer, further tightening the rental market and increasing costs for all renters.