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Buying a starter home in New York was already a stretch for the average household.
Now mortgage rates are back above 7% — adding yet another hurdle for would-be homeowners already contending with stubbornly high prices and a shortage of homes for sale.
The New York metropolitan area is the fifth-hardest place in the country to get on the property ladder, according to new research from personal-finance company Achieve.
An entry-level home in the metro costs about $489,359, while the median household earns $99,155.
Assuming a 10% down payment and keeping mortgage payments to 30% of gross income, Achieve calculated that a household would need to earn $114,380 a year to comfortably afford that home — 15.4% more than the typical household actually makes.
And that calculation comes as borrowing costs are heading in the wrong direction.
The average 30-year fixed mortgage climbed back above 7% this week after years of languishing inflation, further eroding the purchasing power of buyers who need financing.
For buyers, however, the problem is much bigger than the mortgage rate alone.
Appraiser Jonathan Miller, of StreetMatrix, told The Post that an acute shortage of homes for sale is preventing the normal market correction that might otherwise give buyers some relief.
“When we think about affordability, I think the influence of inadequate inventory is more powerful on the affordability topic than actual rates themselves,” Miller said.
Normally, Miller explained, a sharp increase in borrowing costs would cause sales to fall, inventory to build and prices to soften.
This time, that last part isn’t happening.
“Mortgage rates are over 7%, and prices are still rising, right? That’s not logical to many people,” Miller said. “But the reason it’s not logical is because the limited inventory is distorting everything.”
Buyers are getting squeezed from every direction
Part of the problem is the so-called mortgage “lock-in effect.”
Millions of homeowners secured ultra-low mortgage rates in previous years and now have little financial incentive to sell their homes and take out a new mortgage at around 7%.
“You’ve got to get all the people that are sort of locked in because they’ve got a 2.75% mortgage,” Miller said. “There’s no way they’re gonna trade that for a new house with a 7.2% mortgage. They’re gonna sit tight.”
The result is a vicious circle: higher rates make buying more expensive, but they can also discourage existing owners from selling, restricting inventory and helping keep home prices elevated.
“The bigger problem for affordability is rising rates keep inventory from coming into the market,” Miller said.
Jessica Peters of Douglas Elliman said buyers who expected higher borrowing costs to bring substantially cheaper homes have largely been disappointed.
“Buyers are being squeezed from both sides,” Peters told The Post. “Borrowing costs remain elevated, but New York home prices have remained resilient, particularly in desirable neighborhoods where inventory is limited.”
And the mortgage is only one line on a New York homeowner’s bill.
“New Yorkers also have to account for maintenance or common charges, taxes and closing costs, so the monthly carrying cost can become substantial very quickly,” Peters said.
Buyers are responding by recalibrating rather than necessarily giving up altogether, according to Peters — increasing down payments, lowering their budgets, expanding their searches into different neighborhoods or choosing a smaller apartment or co-op instead of a condo.
But those with the least cash have fewer options.
First-time buyers who rely more heavily on financing “feel every movement in mortgage rates,” Peters said, while buyers with proceeds from a previous sale or greater liquidity have more room to maneuver.
That divide is especially stark in Manhattan, where Miller said the upper half of the market is currently performing better than the lower half.
“As you move higher in price, there’s less reliance on mortgage rates, and as you move lower in price, there’s more reliance on mortgage rates,” Miller said.
Donald Brennan, broker/owner of Engel & Völkers New York City, Brownstone Brooklyn, North Fork and Hoboken, said the divide has become striking among his firm’s current New York clientele.
The buyers currently working with advisers in his New York City office are all paying cash, Brennan said — compared with a more balanced mix of cash and financed buyers in the past.
“The people that are still buying are the cash buyers,” Brennan said.
Waiting for lower rates may not solve it
For buyers struggling to make the numbers work, waiting for mortgage rates to fall might seem like the obvious answer.
But a lower rate doesn’t necessarily translate dollar-for-dollar into greater affordability.
“A lower mortgage rate absolutely helps the monthly payment, but it doesn’t solve the affordability equation by itself,” Peters said.
If rates fall and more buyers rush back into a market where inventory remains scarce, that new demand could put additional pressure on prices.
“For affordability to meaningfully improve, buyers need not only cheaper financing but also more housing options at a wider range of price points,” Peters said.
Realtor.com senior economist Jake Krimmel also cautioned against looking at a mortgage rate in isolation. For buyers, what ultimately matters is the rate in relation to the price they’re paying and their overall housing budget.
Realtor.com research suggests buyers three months from closing should prepare their budgets to withstand roughly 50 basis points of movement in either direction, rather than assuming today’s rate will still be available when they close.
And the old real-estate mantra of “buy now, refinance later” isn’t a guarantee either.
Miller said that strategy made more sense a few years ago, when there was a stronger case that buyers could refinance into a lower rate down the road.
Today, he said, “you’re gambling on more affordability later on.”
“If you’re waiting for rates to come down, I think that’s gonna be a long wait,” Miller said.
That’s because many of the forces currently putting upward pressure on borrowing costs aren’t disappearing, he said, pointing to inflationary pressures, the federal deficit and geopolitical and trade uncertainty.
While the Federal Reserve doesn’t directly set mortgage rates, its monetary policy and the broader inflation outlook influence the market in which mortgage rates are determined.
Miller believes those conditions could keep borrowers in a “higher for longer” mortgage-rate world for at least the next several years.
“There’s no expectation that any of those will be leaving us over the next couple of years,” he said.
The outlook is murky enough that Miller has another way of describing the current housing market:
“Our uncertainty has uncertainty.”
The squeeze doesn’t end with homebuyers
Higher mortgage rates can also make life more expensive for people who aren’t buying at all.
“Rising mortgage rates make rental prices rise,” Miller said.
Would-be buyers who can no longer afford to purchase remain renters for longer, he explained, leaving fewer apartments available for newcomers and adding pressure to an already expensive rental market.
“When we talk about impacting affordability, it’s not just the purchase market,” Miller said. “It’s the rental market as well.”
That leaves some New Yorkers caught between an expensive purchase market and an expensive rental one.
And for families who genuinely need more space, waiting indefinitely isn’t always an option.
“Children generally don’t stop growing just because the borrowing rates have increased,” Brennan said.
For those buyers, the question isn’t whether the market will suddenly become cheaper — but whether they can make the numbers work under the conditions that exist today.
