This metric tells you how a mortgage-rate move impacts your home buying ability

How big of an impact can a $1,000 increase in the price of a home make? How about a 0.25 percentage point increase in mortgage rates?

The National Association of Home Builders (NAHB) sets out to quantify just that with their priced-out estimates. It assigns a number to how many people that seemingly small adjustment in price or mortgage rates would leave out of the housing market.

In its last report, the number crunching showed that 117,932 more households would be disqualified from obtaining a new mortgage with a $1,000 increase in price. And, when mortgage rates were historically low, adding just 25 basis points to bring a mortgage rate to 3.5% would price out 1.1 million more households. Of course, interest rates today are much higher.

This “priced-out” metric is particularly relevant now because the lack of supply in the housing market compared to the amount of new household formations has pushed demand and prices up in recent years. Since the Great Recession, building has slowed to a point where there is now a deficit of almost six million homes in the U.S. according to a November report from Realtor.com. 

On top of the dramatic increase in home prices, a 30-year fixed-rate mortgage more than doubled from as low as 2.65% in January 2021 topping out to just over 7% at the end of last October. They are currently hovering just above 6%. Using estimates from NAHB, this means over 16.3 million more potential home buyers are estimated to be priced out of the housing market compared to two years ago. 

A staggering number of households are priced-out of the housing market

Even at a mortgage rate of 3%, over 65% of households would be considered “priced-out.”

That’s why the next “priced-out” forecast for 2023 will be more focused on mortgage-rate increases, according to economist Doctor Na Zhao, who writes the report for NAHB.

As for the impact of the metric, Zhao hopes that it helps inform local housing associations about what’s happening in their area and that it helps in the legislative decision-making process. For the general public, she wants people to think about how a $1,000 increase in the home prices, or a 25 basis points increase in the interest rate, would price out so many households out of the market.

No metric is perfect, so compromises and assumptions have to be defined based on the underlying data. Zhao says one of the main points she hopes people recognize is that the estimate is conservative, acknowledging that there are various government assistance programs for loans from the Federal Housing Administration. But she adds it’s important to start at a minimum. 

The report is further broken down by state and metro areas (as defined by the Census’s metropolitan statistical areas) to help local associations and lawmakers make decisions and understand their specific housing market. However, it’s one part that Zhao says is the most challenging part of producing the report.

At the national level, the median cost of new home prices is published by the Census every month. However, for state and metropolitan data, NAHB calculates their own estimates by looking at permits at these levels. In addition, she notes that there is often back-and-forth with their data sources like the National Association of Realtors to replace missing data, or efforts to reconcile random numbers that are sometimes inputted as placeholders when a number is unknown.