Housing Affordability

As the housing market improves in Virginia, in many markets, affordability remains a challenge for individuals and families, particularly first-time homebuyers. Low inventory and rising home prices have aggravated affordability; however, low mortgage rates can make it easier for Virginians to afford to buy a home.

Throughout the spring and into the summer, mortgage rates have fallen to record lows. According to Freddie Mac, last week, the average 30-year fixed-rate mortgage rate fell to 3.07%, down from 3.18% a month earlier and down from 3.75% from a year ago. Record low mortgage rates have driven a refinance boom and have helped sustain the for-sale market during the COVID-19 pandemic and economic downturn.

Low interest rates can also positively impact housing affordability. For example, a homebuyer taking out a loan for $300,000 with a 3% mortgage rate would have a monthly mortgage payment of $1,265 (assuming no PMI). At a 4% mortgage rate, the homebuyer’s monthly payment would increase to $1,432, a difference of $168. Over 30 years, this amounts to a more than $60,000 in mortgage payments. In addition, to qualify for the loan at the higher mortgage rate, an applicant would need a higher income. To qualify for this $300,000 loan, an applicant’s income would need to be about $8,000 higher, on average.

Even though home prices have risen in Virginia this year, the low mortgage rates have actually made it more affordable to buy in 2020 than it has been over the past few years. In May 2020, the median sales price statewide in Virginia was $315,000. Assuming a 20% down payment and the average 30-year fixed-rate mortgage rate for May, the monthly payment would be $1,093.96. Two years earlier, in May 2018, the median sales price was $295,000, seven percent lower than in 2020. However, because of the higher mortgage rates in 2018, the monthly payment for the median-priced home was 10% higher.

Impact of Mortgage Rates on Monthly Payments

Year Median sale price (May) 30-year fixed-rate mortgage rate, % (May average) 20% downpayment Loan amount Monthly payment
2020 $315,000 3.23 $63,000 $252,000 $1,093.96
2019 $309,900 4.07 $61,980 $247,920 $1,193.63
2018 $295,000 4.59 $59,000 $236,000 $1,208.43
2017 $287,000 4.01 $57,400 $229,600 $1,097.47
2016 $277,500 3.60 $55,500 $222,000 $1,009.31

Source: Virginia REALTORS®

Low mortgage rates can make it easier for individuals and families to qualify for a home loan, even as home prices continue to rise. However, a major obstacle, particularly for first-time homebuyers, is the ability to come up with a down payment. Student and other debt also make it difficult for some would-be homebuyers to qualify for the historically low interest rates.

For more information, please contact Lisa Sturtevant, Chief Economist, Virginia REALTORS®, lsturtevant@virginiarealtors.org.