Maybe 7% Isn’t the Real Problem

Mortgage rates pushed above 7% this week.

If you bought or refinanced when rates started with a 3, that number probably looks crazy. If you’re trying to buy your first home, that number looks like something out of a horror movie.

But here’s the part that gets lost in the headlines:

A 7% mortgage rate is not historically outrageous.

If you remove the double-digit mortgage rates of the 1980s and the extraordinarily low rates of the 2010s and pandemic years, 7% lands surprisingly close to the middle.

That doesn’t make the payment any cheaper. But it does suggest something important:

Waiting for 3% or 4% mortgages to return is not a very good housing strategy.

The big affordability problem isn’t mortgage rates…and, believe it our not, it’s not really home prices either.

Phoenix home prices have largely settled back from the COVID spike

Greater Phoenix resale homes are currently averaging about $289.50 per square foot.

That number still looks enormous compared with the $95.67 per square foot we saw in 2000. And there’s no question that the pandemic housing market pushed prices upward at an unsustainable pace.

But you might find this surprising:

If we remove the two big housing market extremes—the housing bubble/Great Recession and the post-COVID buying frenzy—and homes had simply appreciated at a steady historical rate of 4.2%, home prices would land around $280–$285 per square foot today.

We’re at $289.50….About 2.4% higher than “normal”.

Surprised?

I get it – that’s not cheap. But home prices are closer to historically sustainable levels than many people assume.

So why does housing still feel so unaffordable?

Income.

That’s the pinch point.

Phoenix-area family income has grown substantially over the past 25 years, but home prices have grown considerably faster.

The good news? In 2000, median family income was about $53,100. Today it’s roughly $112,400.

That’s an increase of about 112%.

The bad news? During the same period, Greater Phoenix residential sales price per square foot increased from $95.67 to $289.50—about 203%.

If housing prices had simply kept pace with family income since 2000, we’d be closer to $202 per square foot, not $289.

That doesn’t mean homes “should” cost $202 per square foot. Land, labor, materials, population growth and plenty of other factors influence housing values.

But it does explain why households feel squeezed.

The real affordability problem isn’t simply high home prices or high mortgage rates.

It’s that home prices have outrun household earning power—and now buyers are financing those homes at something closer to a historically normal interest rate.

That combination hurts.

What does that mean if you want to buy?

For a first-time buyer, stop making the decision based on predictions about what mortgage rates might do.

Could rates fall? Sure…maybe.

Could they still be around 7% a year from now? Yup.

The safer question is:

Does the house and payment work for your life at today’s numbers?

If the answer is yes, today’s slower market can actually give you something buyers didn’t have during the frenzy: time to think, more homes to choose from and some negotiating leverage.

If the payment only works because you’re assuming you’ll refinance into a 5% mortgage next year, well, I wouldn’t build a household budget around that assumption.

Move-up buyers have another issue entirely.

If you already own a home with a 3% or 4% mortgage, you’re sitting on an extraordinarily valuable piece of financing.

Moving into a more expensive home at 7% can create an enormous payment jump—even if you have substantial equity.

So the decision becomes less about whether you can buy the next house and more about whether the lifestyle improvement is worth the additional monthly cost.

For many homeowners, the answer may be yes.

For others, improving the house they already own may make considerably more financial sense.

What should we expect over the next year?

I would not plan around a major reset in either home prices or mortgage rates.

Inflation remains stubborn, energy prices have added new pressure, and the bond market is keeping mortgage rates elevated. None of that makes a dramatic drop in borrowing costs impossible, but it makes it a poor base-case assumption.

On the housing side, Phoenix appears to be doing much of its correction through time rather than a crash.

Prices have largely stopped racing upward. If they remain relatively flat while incomes continue rising, affordability gradually improves without home values needing to fall dramatically.

That process is slow.

But it matters.

One more question: Is a house still a good inflation hedge?

Generally, yes—if you buy something you can comfortably afford and plan to own it for a while.

Phoenix resale prices have appreciated at roughly 4% annually over the long run once you smooth out the extreme boom-and-bust periods.

And with a fixed-rate mortgage, your principal and interest payment stays the same while wages, rents and prices generally rise over time.

That’s one of the understated advantages of homeownership during inflation.

But that doesn’t mean buying any house at any price is a smart inflation strategy.

A first-time buyer purchasing a reasonable home for the long term may be locking in housing costs and building an asset that historically appreciates.

A move-up homeowner already owns that asset. Buying a larger house with a much more expensive mortgage doesn’t necessarily improve the inflation hedge.

The bottom line

Mortgage rates in the 7’s feels high because we recently lived through an extraordinary“once-in-a-lifetime” period of cheap money.

Phoenix home prices feel high because they rose like a rocket thanks to investors leveraging cheap money after COVID.

But when you pull back and look at the longer history, rates and home prices may both be closer to normal than they feel.

Household income is the part that hasn’t fully caught up.

That means the next improvement in housing affordability may not come from a spectacular drop in rates or home prices.

It may simply come from time, wage growth and a housing market that finally stops sprinting long enough for households to catch up.

And for the average person thinking about buying or selling, that means the question is isn’t:

“When will the market get back to normal?”

…rather:

“Can I make the numbers work in the market we actually have?”