Jill On Money: Is 6% the solution to housing affordability?

Last week, the average for 30-year fixed mortgage rates dropped below 6% for the first time in 3½ years. Freddie Mac reported that as of Feb. 26, the 30-year rate was 5.98%, down from 6.76% a year ago, and significantly lower than the recent peak of 7.8% in October 2023.

Lower rates should help borrowers, but important, they may also encourage sellers to list their homes and move. As of the end of Q3 (the most current data available), the percentage of outstanding home loans under 4% is 51.5%, so even a 6% loan makes it difficult for homeowners to sell their homes and buy a new home since their monthly payments would increase sharply. This so-called “lock-in effect” has kept a lid on inventory.

If you suspended your house hunting back when rates were above 7%, don’t get too excited about your prospects now. Housing affordability has improved, but only slightly.

The Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor (HOAM) provides a monthly measure of the median-income household’s capacity to afford the median-priced home. The tracker takes into consideration the monthly principal and interest cost, given the current mortgage interest rates, as well as the costs associated with taxes, property insurance, and private mortgage insurance to determine the total monthly cost of carrying the house.

HOAM uses the U.S. Department of Housing and Urban Development (HUD) standard 30% share of income threshold to measure affordability. If the annual cost is below a 30% share of income, homeownership is considered affordable, and if it is above, homeownership is considered unaffordable.

Here’s why the housing market was so compelling amid COVID, compared with today:

December 2020

• Median household income = $68,585
• Median home price = $286,800
• Mortgage interest rate = 2.7%
• Total monthly cost = $1,596
• Affordability = 28%

December 2025

• Median household income = $85,331
• Median home price = $398,667
• Mortgage interest rate = 6.2%
• Total monthly cost = $2,999
• Affordability = 42%

If you are able to afford a home because your income can absorb all of the costs, you should run the numbers. Consider job security and always ask yourself if you were to buy, could you continue funding other goals like retirement or education funding.

It’s fine to ease off the accelerator on funding those for a few years, but if buying a home blows up your longer-term plans, you may be overextending.

I always like to remind folks that owning a home is not the only way to accumulate wealth. Renters should remember that money that they would have spent on a down payment, mortgage, taxes, insurance, and ongoing maintenance is available to save and invest for the future.

Refinancing refresher
If you have a mortgage rate in the 7% range, you have probably been monitoring every tick of the mortgage market, so breaking below the 6% level is tantalizing. Because every refinance has costs, you need to run the numbers.

Fannie Mae has a good calculator, but the basic idea is to determine the total closing costs of refinancing a loan and then divide that amount by the monthly savings that the refi will mean for you. The result will tell you how many months it will take to break even on a refi.

For example, if closing costs total $5,000 and a refi will save you $200 per month, then you need to stay in the loan for 25 months in order to break even on the refinancing. Even if you are facing a longer time horizon, if your house has gone up in value, you may be able to eliminate Private Mortgage Insurance (PMI), which could also save you money.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.