New Car Payments Reduce Homebuying Power by $135,000

The average monthly payment for a new car reached an all-time high of $770 in the first quarter of 2026, representing a nearly 3% increase from the previous year, according to Experian data. This surge in auto payments, driven by a 30% rise in new-car prices since 2020 and auto-loan rates exceeding 7.5% in February 2026, is significantly impacting consumers' ability to afford homes. For a median-income household, the increased cost of car ownership can translate to a reduction in homebuying power of up to $135,000, effectively lowering their purchasing capacity from a $530,000 home to a $394,000 one, assuming a standard 10% down payment.

Auto debt has become the second-largest category of household debt, trailing only mortgages. The escalating car payments are now directly competing with housing costs at a critical juncture when buyers are seeking mortgage approval. Real estate agent Michael Perna noted that the high cost of vehicles is forcing buyers to consider less desirable neighborhoods or homes lacking necessary amenities, effectively pushing them out of their preferred markets.

The primary mechanism through which car payments affect mortgage eligibility is the debt-to-income (DTI) ratio. Lenders utilize this metric to assess a borrower's total recurring monthly debt obligations against their gross monthly income to determine mortgage affordability. While specific thresholds vary among lenders and loan programs, a DTI of 43% is commonly used as a benchmark for total monthly debt. The rising auto loan payments are increasingly contributing to borrowers exceeding these DTI limits, making it more challenging to secure a mortgage for a home.

As home prices and mortgage rates continue to remain elevated, and other forms of household debt persist, the financial calculation for potential homebuyers becomes increasingly difficult. The substantial increase in new-car payments is a significant factor that buyers and lenders must now contend with, directly diminishing the purchasing power available for real estate.