Interest Rate Increase Affects Housing Market??????

That was the headline last week when the Federal Reserve raised the Federal Funds Rate ¼ % .

What is the Federal Funds Rate? It is the interest rate that U.S. Banks charge one another to borrow or lend money to each other, over- night. Prior to this increase, the target rate was 3.5% to 3.75%. Now the target rate is 3.75% to 4%

It is believed that increasing the Federal Funds Rate has an impact on tempering inflation. When rates are increased, it is thought that inflation will be reduced, as consumers will reduce their borrowing, or spending, thus reducing inflation. 

When rates are lowered, it is expected that consumer interest rates, to borrow money, will be lower, and consumers will spend more , with a positive impact on the economy.

However, lower rates also mean that interest rates, on your bank savings deposits, will also be lowered.

Is it that simple? I don’t think so. Today there are other variables that affect consumer spending that may not be considered. Our economy is so diverse,  and is affected by a myriad of actions, that increasing or decreasing interest rates is not always the answer. One impact is tariffs. The growing Global Economy is another.

As the headline above referenced, it is believed that the increase in the Federal Funds Rate will have a significant negative affect on the housing industry.

Thirty year conventional mortgage rates increased to 7.22% after this increase. The housing experts believe that this will cause a decrease in sales of new as well as older homes.

I don’t necessarily disagree, but there is another factor that needs to be considered. The price of homes!

Industry experts indicate that the average price of a home in 2025 was $541,300.

In 1965, the average home price amounted to $21,500. and the median family income we $6,900. As a result the price to income ratio was 3.11 to 1.

The median family income in 2025 amounted to $83,592. That results in a price to income ratio of 6.47 to 1.

What does that all mean?

In 1962, we purchased our first home in Woodbridge, VA. It cost $11,500. , my income was $5,000 annually. Again, the ratio was a little over 2-1. In this case the interest rate was 6%, but we only put 10% down, and as a result we had to have private mortgage insurance.

Private Mortgage Insurance (PMI) is a cost that you must pay if you buy a home and put less than 20% down. A home mortgage is considered normal when the purchaser puts 20%, or more, as a down payment. It is believed that if you put 20%, or more, down that you are less a risk, than if you only put 10% down.  In essence, a smaller down payment equals greater risk.

In order for a lender to cover that risk, the purchaser must buy private mortgage insurance. The cost is a function  of your credit score, and will generally run from 0.3% of your loan, for someone with a strong credit score, to 1.5% for someone whose credit score is not very good.

PMI can be canceled once your loan to value of your home reaches 80%. You must request cancellation.

If the loan to value gets to 78%, the lender is required to automatically terminate the PMI.

There is one other time when PMI must be cancelled. It is described as a “mid-point termination rule.” If at the mid-point of your loan, you are current on all payments, and you are still not at the 78% point, the lender must cancel the PMI

In 1965, my wife and I purchased our second home,  in Rockville, MD. We paid $22,500. My income amounted to $7,000. annually. As a result, the cost of the home was 3.2 times my income. In that time period, mortgage lenders wanted your income to be at least  one third of the value of the home. The interest rate on our loan was 6%, after a 20% down payment.

In the 1960’s and early 1970’s, a wife’s income could not be considered in purchasing a home. The theory was that they may become pregnant and have a child, thus becoming a stay at home Mother with no income. Fortunately that changed as more women entered the work force.

The following data and information is based upon the Bureau of Census, Bureau Survey of Construction Costs, and the Freddie Mac Primary Mortgage Survey  data.

If we were to compare housing prices in 1965 with current prices, there are a number of anomalies .First we need to look at the average inflation rate. Since 1965, the average inflation rate has been averaging 3.95% per year or a cumulative rate of 963.43%.  In 1965, the inflation rate amounted to only 1.61%.

In 1965, the median house price in the U.S. was $20,000. The unemployment rate was 4.5% and a 30 year home mortgage rate was between 5.5% and 6%.

The maximum home price needed to be between 2.5 to 3 times your annual income to obtain a standard loan.  A conventional loan for a  $20,000.  home, with 20% down , and an  interest rate of 5.74%, results in a monthly payment of principal and interest of $93.00. With fire insurance, and taxes, the total would amount to approximately $125.00. Using a  pre-tax  income of $7,000., the total would amount to approximately 21% of income, before personal taxes, on an annual basis.

Today, using the average median price of a home of $541,300, an interest rate of 7%, with 20% down ($108,260),  results in a 30 year mortgage of $433,040. The monthly principal and interest  amounts to a monthly payment of $3,256.03, before taxes and insurance.  Adding another $500. per month for taxes and insurance, would make the total payment almost $3,800. per  month.

If one were to take the average median family income in 2025 of $83,592., then the  monthly payment would amount to 54.5% of that average median family’s annual  income, before personal income taxes. Quite a difference in comparison to 1965.

If one were to only put 10% down ($54,130) then the amount financed of $487,170, at 7%, results in a monthly payment of principal and interest in the amount of $3,616.15. Adding 1% for PMI would add another $400+ to that amount, plus another $500. for taxes and insurance would result in a monthly payment of over $4,500. In this case, the mortgage payments would amount to over 64% of today’s average median family income, before personal income taxes.

Today’s Consumer Price Index (CPI) has increased the equivalent of 10.63 times that of 1965. The CPI measures the increases in the prices of  food and beverages, housing, apparel, transportation, medical, recreation and education.

However, real estate prices have increased 4 times the rate of the general CPI.

In 1965, the minimum Federal Wage was $1.25 per hour. Today, the official Federal minimum wage is $7.25, but the general minimum wage amounts to $13.21.

In summary, wages have not kept pace with inflation. The income required to purchase the average home today is over twice what it was in 1965, and the price of homes have increased over 4 times the CPI index since 1965, with interest rates remaining almost the same.

Obvious there is a disconnect, and it cannot be blamed on interest rates.

Housing economists view the “current affordability deficit as a structural, generational problem, rather than a cyclical one.”

The phrase “ It’s the economy stupid” was coined by James Carville in 1992 when he was Bill Clinton’s strategist in Clinton’s presidential campaign.

I would say today, “ It isn’t the interest rate, stupid.”

Will it change? Only time will tell.

Jess Sweely

Madison, Virginia

September 21, 2026