NCCapital

America’s housing affordability crisis is entering another difficult phase as mortgage rates climb back above 7% and sellers increasingly cut asking prices to attract buyers. The average rate on a 30-year fixed mortgage reached 7.03% on Thursday, creating another obstacle for households already dealing with historically expensive homes.

The housing market had already been showing signs of strain before rates crossed that threshold. Last month, sellers reduced asking prices on nearly one in five homes listed for sale, the highest share recorded for any month since 2020, as properties sat on the market longer and buyers became increasingly selective.

The combination of elevated mortgage rates and expensive homes has dramatically changed what buyers can afford. Even relatively small movements in borrowing costs can add hundreds of dollars to a monthly mortgage payment, particularly in markets where typical home prices remain well above pre-pandemic levels.

The 7% level also carries psychological significance. Buyers accustomed to the extraordinarily low mortgage rates available earlier this decade may hesitate when confronted with borrowing costs that are more than double what many existing homeowners currently pay. That gap has contributed to the housing market’s persistent “lock-in” effect.

Millions of homeowners refinanced or purchased properties when mortgage rates were near historic lows, giving them little financial incentive to sell and take out a new mortgage at today’s rates. That dynamic has restricted the supply of existing homes for years, helping keep prices elevated even as affordability deteriorated.

But sellers who do enter the market are increasingly confronting a different reality. Buyers have less purchasing power, more listings are competing for their attention in some markets, and properties that might once have generated immediate offers can now require price reductions before finding a buyer.

National Association of Realtors chief economist Lawrence Yun has suggested that homeowners considering a sale may need to adjust to elevated borrowing costs rather than waiting for a return to the ultra-low rates of the pandemic era. He described the current environment as a “new normal” that both buyers and sellers increasingly have to incorporate into their decisions.

The affordability challenge extends beyond mortgage rates themselves. Buyers must also account for property taxes, homeowners insurance, maintenance expenses and, in some cases, homeowners association fees. Rising costs in several of those categories mean that a lower listing price does not necessarily translate into an affordable monthly housing payment.

That helps explain why widespread price reductions have not yet produced a dramatic rebound in housing activity. Sellers may be lowering their expectations, but many buyers still face monthly payments that stretch household budgets beyond comfortable levels.

The pressure is especially pronounced for first-time buyers, who generally do not have existing home equity available for a large down payment. Higher mortgage rates therefore hit them particularly hard, potentially forcing buyers toward smaller homes, less expensive neighborhoods or longer periods of renting while they save additional money.

For sellers, the market increasingly requires a choice between patience and price. Homes that are competitively priced can still attract buyers, but properties based on expectations from the housing boom of several years ago may struggle as financing costs reshape what consumers are willing—or able—to pay.

The result is an unusual housing market in which sellers are cutting prices while homes remain historically expensive for many Americans. Until either mortgage rates decline substantially, incomes catch up or home prices adjust further, the affordability problem is likely to remain one of the biggest barriers preventing the U.S. housing market from returning to more normal levels of activity.