How Affordability Is Affecting Real Estate Investors
For the past several years, housing affordability has been one of the most significant forces shaping real estate activity across the United States. Mortgage rates climbed from roughly 3% in 2021 to above 7% by 2023, pushing the typical monthly mortgage payment more than $1,000 higher than pre-pandemic levels. That shift dramatically reduced purchasing power and slowed transaction volume across most markets.
Even second-home markets like here in Lake Tahoe felt the impact. While many buyers here bring substantial equity or pay cash, financing costs still influence the overall market. Higher mortgage rates reduce purchasing power for financed buyers and often affect the timing decisions of discretionary second-home purchasers, which slows overall transaction activity.
Today, however, several of the forces that pushed affordability lower are beginning to move in the opposite direction. Mortgage rates have eased from recent highs, home price growth has moderated and wages continue to rise. These three variables—rates, prices, and income—form the foundation of housing affordability, and for the first time in several years they are beginning to align in a way that significantly improves purchasing power.
For investors and luxury buyers, shifts in affordability matter because they influence the depth of the buyer pool. When affordability improves, even slightly, more households can qualify for financing and transaction activity tends to increase.
Housing affordability influences the market in two important ways.
When affordability improves:
• Mortgage payments become manageable for more households
• More buyers qualify for financing
• Some renters become first-time buyers
• Some homeowners gain the ability to move up or purchase second homes
Economists estimate that a one-percentage-point drop in mortgage rates can allow roughly 5.5 million additional households to qualify for a mortgage.
When more households qualify, the potential buyer pool expands. That increase in participants is one of the primary reasons transaction activity tends to rise as affordability improves.
Affordability can also influence buyer psychology.
When buyers see mortgage rates stabilizing or declining, home price growth moderating, and incomes rising, many feel more comfortable making large financial decisions. That shift in confidence can increase discretionary purchases such as second homes, vacation properties, and investment properties.
However, in housing markets, confidence typically follows affordability rather than leading it. As purchasing power improves, more buyers step back into the market and activity begins to increase.
Mortgage rates remain higher than the historically low levels seen during the pandemic, but they have moved meaningfully lower from their recent peaks.
Recent data shows the average 30-year fixed mortgage rate trending near the lowest level seen in roughly three years.
(Graph callout: Mortgage Rates Near Lowest Level in 3 Years)
Even modest changes in mortgage rates can have a significant impact on purchasing power.
For example, a one-percentage-point drop in mortgage rates on a $500,000 loan reduces the monthly principal and interest payment by roughly $350 per month.
For luxury buyers financing larger properties, the impact is proportionally larger. A similar rate change on higher-value loans can translate into thousands of dollars per year in reduced carrying costs.
Lower mortgage rates also expand the number of households that qualify for financing.
Economists estimate that a one-percentage-point decline in mortgage rates could allow approximately 5.5 million additional households to qualify to purchase a home.
Even if only a portion of those households ultimately purchase, the increase meaningfully expands the potential buyer pool.
Another key affordability indicator is the share of household income required to purchase a home.
Currently, the median household would spend about 32.6% of its income on housing costs associated with purchasing a home. That represents the most favorable affordability level since August 2022.
(Graph callout: Buying a Home Is Taking Less of Your Income)
Housing economists generally consider spending more than 30% of income on housing to be unaffordable. While today’s level remains slightly above that benchmark, the trend has begun moving in a more favorable direction.
One of the reasons is that income growth has begun to exceed home price growth.
Since 2025, wages have been rising faster than home prices, gradually improving purchasing power for buyers entering the market.
Another notable shift in the housing market is the pace of home price appreciation.
Following the rapid increases seen during the pandemic housing surge, national home price growth has slowed significantly. Recent data shows home price appreciation reaching one of its lowest levels in more than a decade.
(Graph callout: Home Price Growth Has Moderated)
For investors, slower price growth often signals a healthier phase of the housing cycle.
Extremely rapid price appreciation can strain affordability and reduce transaction volume. More moderate price growth allows incomes and financing conditions to catch up, which helps stabilize demand over time.
This type of market environment often produces more sustainable long-term growth rather than sharp cycles of rapid appreciation followed by corrections.
Housing markets remain highly sensitive to changes in mortgage rates.
Historical data comparing mortgage rates with the Mortgage Bankers Association purchase index shows a consistent pattern: when mortgage rates decline, buyer demand tends to increase shortly afterward.
(Graph callout: When Rates Drop, Buyer Activity Picks Up)
For example:
These shifts illustrate how closely demand tracks financing conditions.
For investors and luxury buyers who are less dependent on financing, periods like this can present strategic opportunities before broader demand fully returns.
Affordability challenges have not disappeared. But the fundamental drivers of affordability are finally beginning to move in a direction that supports gradual improvement.
Mortgage rates have eased from recent highs.
Home price growth has moderated.
Income growth is helping restore purchasing power.
Economists describe the current environment as a period of incremental improvement rather than a sudden reset. Affordability is improving gradually as these forces realign.
For investors, these types of transitions often mark the early stages of renewed market activity.
Markets rarely turn overnight. Instead, improving affordability slowly expands the buyer pool, increases transaction volume, and begins to restore momentum across the housing market.
Luxury and second-home markets like Lake Tahoe often move somewhat differently than primary housing markets. Many buyers bring significant equity from other real estate holdings, business exits, or financial markets.
However, broader affordability trends still influence the depth and timing of buyer demand.
As borrowing costs ease and purchasing power improves nationally, the pool of potential buyers expands. Over time, that can translate into increased activity in lifestyle markets where supply remains limited.
In Tahoe, where inventory is naturally constrained by geography and environmental regulations, changes in demand can have a meaningful impact on pricing and transaction activity.
Get In Touch
