Who Gets Left Behind In This Market

We may flirt with interest rates near 7% again if this war doesn’t end soon. And the conversation in most real estate circles sounds like a five-alarm fire. Not just because of rates but because we are also still seeing a lot of demand. So between both factors, it’s expensive out there.

I want to slow that down. Because history has something important to say about what actually happens in a 7% rate environment – and it’s probably not what you’re thinking.

What History Actually Shows Us About High-Rate Markets

Through the 1990s and early 2000s, mortgage rates settled into what was widely considered a normal range. Rates between 6% and 8% were common, and buyers moved forward without much hesitation. For many homeowners who purchased during those years, a 7% mortgage wasn't viewed as a setback. It was simply the market.

The nationwide homeownership rate actually surged from 63.9% to 66.8% during the 1990s - a decade when mortgage rates spent most of their time above 7%. People bought homes. Families built wealth. The market moved.

Here is the counterintuitive truth that gets lost in today's rate panic: studies show that mortgage rates and home prices have a weak short-term correlation of about 0.26 - meaning they sometimes rise together. A lagged effect does emerge over time: when rates rise quickly, home price growth slows within one to two years. But extended periods of stable high rates do not necessarily produce falling prices.

The median 30-year mortgage rate since Freddie Mac began tracking in 1971 is 7.31%. Let that land for a moment. The rate your buyers are panicking about is basically the historical average. The anomaly was not 7%. The anomaly was 2.65%.

Now I already know what you're thinking: Sure, but homes weren't $400,000 in 1995. 

Fair. In the early 1980s when rates hit 18%, the median U.S. home price was under $70,000. The math was different. I'm not going to pretend otherwise.

But here is what that objection misses.

Wages were also dramatically lower. The percentage of household income required to carry a mortgage payment is the more honest comparison - not the sticker price in isolation. And by that measure, the most unaffordable moment in recent history was actually October 2023 - when rates hit 7.79% on top of pandemic-era price appreciation that had already run 37% in two years. That combination - rapid price appreciation followed immediately by rapid rate increases - is what created the affordability crisis. Not 7% rates alone.

Historically, high rates and high prices have rarely arrived together the way they did in 2022 and 2023. That double compression is what made those years genuinely brutal. What we are experiencing now is elevated rates on prices that have mostly stabilized - which is uncomfortable, but it is a vastly different animal.

Even with recent rates, many households are budgeting around the payment rather than the home price which is actually how most buyers in the 1990s approached it too. The payment-first mentality is not new. It is just newly relevant again.

The Lesser-Discussed Ripple Effects of High-Rate Markets

This is the part of the high-rate conversation that rarely makes it into real estate content. But it should.

The lock-in effect freezes inventory. Research from the FHFA found that mortgage lock-in prevented 1.72 million transactions from 2022 through mid-2024 and increased home prices by 7.0%. Read that again. High rates did not lower prices - they raised them, by keeping sellers who bought at 3% locked in place. By the time rates peaked in October 2023 at 7.79%, the principal and interest payment for the median priced home had jumped 78%. Not because prices exploded. Because the combination of higher rates on higher prices compounded.

Labor mobility shrinks. This one almost nobody talks about in real estate circles. When people cannot afford to sell their home and buy a new one at a higher rate, they stop moving for jobs. They turn down promotions in other cities. They stay in houses that are too small or too far from where they work. High mortgage rates do not just freeze the housing market - they freeze people in place professionally and personally. The economic ripple extends well beyond real estate.

Rental demand surges -- and so do rents. As home prices remained high and rates climbed in 2022 and 2023, renting became a more financially attractive alternative, driving increased demand for rental units. Landlords benefit. First-time buyers who cannot qualify or cannot stomach the payment get pushed into a rental market that simultaneously gets more expensive. It is a compounding trap.

Wealth concentration accelerates. High-rate environments favor cash buyers, institutional investors, and existing homeowners with equity. The people most harmed are the ones trying to break in for the first time - which is exactly why the housing bill we covered last week matters as much as it does.

Geographic migration shifts. High-rate environments historically accelerate migration to lower cost-of-living markets where the same rate produces a more manageable payment. We saw this play out dramatically from 2022 to 2024 - Sun Belt markets, secondary cities, and lower-priced metros absorbed buyers priced out of coastal markets. Reno benefited from this directly and real estate professionals here should be pondering this right now.

Even more that isn’t really being discussed.

All of that history assumes that the buyers who cannot buy are simply priced out.

But right now there is a meaningful group of people in this market who absolutely have the financial resources to buy a home - and are being told no by a system that was not built to understand how they actually make money.

I've started calling this borrower the Modern Earner.

Not because their financial situation is complicated. Because the system hasn't caught up to how they actually make money. The “new rich” don't always look rich on paper. But they exist in every market, at every price point. And right now they are one of the most underserved borrowers in real estate.

Let me paint you a few pictures.

The VC-Funded Tech Founder

She raised her Series A last year. Her company is valued at $12 million. She just started taking a real salary for the first time in three years. Before that she paid herself $4,000 a month and reinvested everything back into the company. Her personal tax returns show almost nothing. Two years ago she was technically below the poverty line on paper. Today she has $800,000 in her bank account and a term sheet for a Series B. A conventional lender looks at her two-year tax return average and tells her she qualifies for nothing. 

The Business Owner with a Write-Off Strategy

He runs a successful construction company. Gross revenue last year was $4.2 million. His accountant -doing exactly what good accountants do - ran $1.8 million in legitimate business expenses through the return. On paper his adjusted gross income is $190,000. His actual cash flow, the money that hits his personal accounts, is well over $500,000 a year. A conventional lender calculates his DTI on $190,000 and tells him he cannot afford the house he has been paying his employees to build for other people for fifteen years.

The Investor with 11 Mortgages

She is a real estate investor with a portfolio of 11 properties generating $18,000 a month in rental income. She has never missed a payment. Her properties are appreciating. But Fannie Mae's conventional guidelines cap investment property financing at 10 financed properties. She has 11. She calls a lender, gets told she is at the limit, and walks away thinking she cannot buy. Nobody told her that DSCR loans exist specifically for her scenario - where the property's income qualifies the loan, not her personal income at all.

These are not edge cases. These are your clients. Or your clients' referral partners. Or the person sitting at your open house next weekend who writes a check for $25,000 in earnest money and then gets turned down by three lenders who did not know how to read their file.

The Webinar I'm Hosting Next Week

This is exactly why I'm focusing my podcast next week on the Modern Earner.

Here is what we are going to cover:

Bank statement loans: 12 or 24 months of personal or business bank statements replace tax returns entirely, and income is calculated on actual deposits rather than taxable income. This is the product built for the business owner above.

DSCR loans: Debt Service Coverage Ratio financing, where the rental income of the property itself qualifies the loan. No personal income required. No DTI calculation. Built for the investor above.

Fannie Mae, Freddie Mac, and FHA guidelines: This is the part that surprises people most. A significant portion of Modern Earners are actually being wrongly disqualified from conventional financing by loan officers who do not know the guidelines well enough to find the path. The founder who just started drawing a real salary? There is a Fannie Mae guideline for recent income increases that most lenders never use. The business owner with the write-offs? There is a calculation method for self-employed borrowers that adds back specific expenses before calculating qualifying income. The investor at 11 properties? There is an exception process and a product specifically designed for that exact scenario.

The problem is not always interest rates and affordability. Sometimes the biggest hurdle between a hopeful buyer and their new home is a lack of experience or creativity from their lender. 

I hope I’ll see you at Property Pursuits next week so we can dive into all of this.