Mortgage Rates Are Not the Problem. Home Prices Are 25% Above Historical Norms

Mortgage rates are not the problem in the U.S. housing market.

That might sound strange when the average 30-year fixed mortgage rate is around 6.7%. But historically, today’s mortgage rates aren’t particularly high.

In fact, they’re remarkably normal.

The long-term average mortgage rate going back roughly 136 years is around 6.4%. And when today’s mortgage rate is compared with inflation, the spread is also close to historical norms.

The bigger problem is home prices.

Home prices relative to household incomes remain more than 20% above their long-term average. That’s one of the main reasons buyers remain priced out and home sales are stuck near historically depressed levels.

Until that imbalance improves, waiting for mortgage rates to fall probably isn’t going to fix the housing market.

Mortgage Rates Are Not the Problem When Prices Remain This High

It’s important for housing analysts, buyers, and policymakers to understand the long-term perspective.

Because almost every conversation about housing affordability eventually comes back to mortgage rates.

Rates need to fall to 6%.

Or 5.5%.

Maybe even 5%.

Then buyers will supposedly come flooding back into the market.

But that argument ignores the bigger affordability problem.

The national home-value-to-income ratio currently sits around 4.31x, according to the figures in this analysis. The long-term 70-year average is closer to 3.54x.

That puts home prices roughly 22% above the historical relationship with incomes.

And depending on the exact measurement period and dataset, the overvaluation is around 20% to 25%. The long-term price-to-income data makes the affordability problem clear. Today’s home-value-to-income ratio remains far above its historical average, with only a few periods over the last 70-plus years reaching similarly extreme levels.

That’s the affordability problem.

Even if mortgage rates decline somewhat, buyers would still be financing home prices that are historically expensive compared with what they earn.

Home Prices Have Only Been This Expensive Twice Before

The historical comparison gets even more interesting.

There have only been two other major periods when U.S. home prices reached similar multiples relative to household income.

The first was the 2006 housing bubble.

The second occurred during the housing boom immediately following World War II.

Neither period maintained those extreme valuations indefinitely.

But the adjustment happened very differently.

After the 2006 housing bubble, home prices crashed. Millions of homeowners went underwater, foreclosures surged, and national prices declined significantly.

After World War II, the adjustment was much slower.

Home prices largely stopped appreciating for an extended period while wages increased rapidly. Income growth gradually caught up with housing values, bringing the price-to-income ratio back toward normal levels.

Those two periods provide very different roadmaps for today’s housing market.

Prices could decline.

Or prices could stagnate for years while incomes catch up.

Either way, history suggests that maintaining home prices permanently above their normal relationship with incomes is difficult.

Why 6.5% Mortgage Rates Feel So High

So why does a 6.5% mortgage rate feel so extreme today?

Because Americans got accustomed to an extraordinary period of cheap money.

From roughly 2009 through 2021, mortgage rates spent years at levels that were historically unusual. Rates eventually dropped below 3% during the pandemic.

That changed people’s expectations.

Homebuyers began viewing 3% and 4% mortgages as normal.

They weren’t.

Looking across more than a century of history, mortgage rates around 5% to 7% have been common. The long-term average is approximately 6.4%. The 136-year history puts today’s mortgage market into perspective. Rates around 5% to 7% occurred repeatedly before 2009, while the prolonged period below 4.5% following the Financial Crisis stands out as the historical anomaly.

The truly abnormal period wasn’t today.

It was 2009–2021.

Mortgage Rates Are Not the Problem When Adjusted for Inflation

There’s another way to understand today’s mortgage market. Compare mortgage rates with inflation.

If the mortgage rate is approximately 6.7% and annual CPI inflation is around 3.1%, the spread is roughly 3.6 percentage points. In fact, today’s spread is almost exactly where history says it should be. The roughly 3.6-percentage-point gap between mortgage rates and inflation matches the 80-year average, making the current rate environment look much less unusual once inflation is taken into account.

Historically, that’s not unusual.

Higher inflation normally produces higher interest rates because lenders need compensation for the declining purchasing power of the dollars they’ll receive in the future.

That’s why mortgage rates became so extreme during the 1970s and early 1980s.

Inflation exploded.

The 30-year fixed mortgage rate eventually approached 18%.

Today’s situation looks nothing like that.

Mortgage rates in the mid-to-high 6% range alongside inflation around 3% are much closer to a normal historical relationship.

But the pandemic was completely different.

The Pandemic Mortgage Market Was the Real Anomaly

At one point during the pandemic, the mortgage-rate-to-inflation spread fell to roughly -4.4 percentage points.

Think about what that means.

Inflation was running significantly higher than the interest rate borrowers were paying on 30-year mortgages.

That was an extraordinary environment created by ultra-low interest rates, Federal Reserve intervention and massive monetary stimulus.

And housing demand exploded.

Buyers could borrow money at extremely low rates while inflation accelerated. Monthly payments remained relatively manageable despite rapidly rising home prices.

That helped push housing values dramatically higher.

Then the environment changed.

Mortgage rates snapped back toward historical norms.

Home prices didn’t.

And that’s where today’s affordability crisis really begins.

Home Prices Haven’t Adjusted to Normal Mortgage Rates

The housing market effectively has prices influenced by the ultra-low-rate era combined with mortgage rates that look much more like the pre-2009 environment.

That’s a difficult combination for buyers.

And existing homeowners haven’t fully adjusted their expectations.

Many purchased or refinanced when mortgage rates were below 4%. Selling means giving up that cheap financing and potentially taking out a new mortgage at around 6% to 7%.

So homeowners are staying put.

Others who test the market aren’t willing to accept lower offers. They simply delist their properties when buyers don’t meet their price expectations.

That helps constrain resale inventory.

And limited inventory prevents prices from adjusting as quickly as they otherwise might.

The result is a housing market stuck between buyers who can’t afford current prices and sellers who don’t want to lower them.

Lower Mortgage Rates Alone Won’t Fix Housing Affordability

Could mortgage rates fall from 6.7% to 5.5%?

Absolutely.

That would lower monthly payments and improve affordability somewhat.

But it wouldn’t erase the underlying price-to-income imbalance.

The bigger adjustment still needs to come from some combination of lower home prices, higher incomes or years of stagnant price growth.

That’s exactly what happened during previous periods of extreme housing valuations.

The important point is that a return to 3% mortgages shouldn’t be the baseline assumption for fixing this market.

Those rates were historically abnormal.

Today’s rates aren’t.

Home prices relative to incomes are.

And until that relationship moves closer to its long-term norm, the U.S. housing market could remain stuck with weak demand and depressed transaction volumes.

Mortgage rates are not the problem the market ultimately needs to fix. Home prices are.