The yield on the 10-year Treasury hit 3.01 percent today. That means mortgage rates are likely going to see continued upward pressure. Rising interest rates diminish home affordability. According to a recent report, if interest rates were to rise to their historical norm of 7 percent, only a third of U.S. homes would be affordable. Freddie Mac considers a mortgage affordable when it costs a homeowner 28 percent or less of their monthly gross income. As with most affordability calculations, this Freddie Mac index makes some pretty optimistic assumptions to make affordability look better than it is. If you can find a house in Houston TX where the taxes and insurance are only 2.18 percent of the value of the property, please let me know. LOL!
This interactive map and calculator from Freddie Mac can help prospective home buyers see how interest rate increases will affect monthly payments, but beyond that the affordability calculations are only generalizations.