Homebuyers on a $2,500 Monthly Budget Have Lost $118,000 in Spending Power This Year Amid Surge in Mortgage Rates

A buyer on a $2,500 budget can afford a $400,000 home with a 6% mortgage rate—that’s compared to a $517,000 home with a 3% mortgage rate

(NASDAQ: RDFN) — A homebuyer on a $2,500 monthly budget has lost nearly $120,000 in spending power since the end of last year as mortgage rates have nearly doubled, according to a new report from Redfin (redfin.com), the technology-powered real estate brokerage.

That buyer can afford a $399,750 home at today’s mortgage rate of roughly 6%. That’s a staggering $117,750 less than the $517,500 home the same budget could have bought at the end of last year when rates were at a near-record-low of 3%. To put it another way, the monthly payment on a $399,750 home would rise more than $500 with the higher mortgage rate, from $1,931 to $2,500.

Nationwide, 45.6% of homes for sale are affordable on a $2,500 monthly budget with a 6% interest rate. By comparison, 61.6% would be affordable if rates were still at 3%. That’s according to a Redfin analysis of homes for sale from May 15 to June 15, and assumes a 20% down payment, a 30-year mortgage, 1.25% property tax rate, 0.5% homeowners insurance rate and no HOA dues.

“Higher mortgage rates are necessary to cool down the red-hot housing market. They’re already slowing competition, but they’re also putting buyers in a tough spot,” said Redfin Chief Economist Daryl Fairweather. “The increase in monthly payments means many house hunters now need to consider smaller homes—perhaps farther from their ideal neighborhood—or stick to renting if they're priced out of the market altogether. And for sellers, smaller homebuyer budgets mean they can no longer expect to get top dollar for their home.”

Rising mortgage rates also impact housing supply, as some would-be sellers may stay put because selling their home and buying another one would mean trading a low mortgage rate for a higher one.

Mortgage rates have been on the rise since January as the Federal Reserve seeks to fight inflation. Last week alone, the average 30-year fixed mortgage rate climbed to 5.78% from 5.23%—the largest one-week jump since 1987 as the Fed introduced the steepest interest-rate hike in nearly three decades.

Although 30-year mortgage rates have shot up, buyers do have other options. Homebuyers can consider adjustable-rate mortgages, which typically have lower interest rates at the beginning of the term but come with risks. And buyers who do choose a 6% interest rate have the option to refinance in the future if rates fall.

Less Than One-Third of Homes For Sale in Phoenix, Raleigh, Las Vegas, Salt Lake City and Austin Are Affordable With a 6% Interest Rate and $2,500 Monthly Budget

Homebuyers have fewer options with a 6% interest rate in all 50 of the most populous U.S. metros—but the impact is biggest in places that were hot homebuying destinations during the pandemic: Phoenix, Raleigh, Las Vegas, Salt Lake City and Austin.

In Phoenix, 21.5% of homes for sale from May 15 to June 15 were affordable on a $2,500 monthly budget and a 6% interest rate. By comparison, about 50% would be affordable if rates were still at 3%. That’s the biggest gap of all the metros in this analysis. In Raleigh, 33.2% of homes are affordable with the 6% rate, compared with 61.1% with a 3% rate, and in Las Vegas it’s 30.7%, compared with 56.7%. Eleven percent of Salt Lake City for-sale homes are affordable with a 6% rate, compared with 36.4%, and in Austin it’s 13.6%, compared with 38.4%.

The smallest impact is in the Bay Area, because so few homes are affordable on a $2,500 budget no matter the interest rate.

To view the full report, including a metro-level affordability breakdown, please visit: https://www.redfin.com/news/rising-mortgage-rates-purchasing-power-drops-2022/

About Redfin

Redfin (www.redfin.com) is a technology-powered real estate company. We help people find a place to live with brokerage, instant home-buying (iBuying), rentals, lending, title insurance, and renovations services. We sell homes for more money and charge half the fee. We also run the country's #1 real-estate brokerage site. Our home-buying customers see homes first with on-demand tours, and our lending and title services help them close quickly. Customers selling a home can take an instant cash offer from Redfin or have our renovations crew fix up their home to sell for top dollar. Our rentals business empowers millions nationwide to find apartments and houses for rent. Since launching in 2006, we've saved customers more than $1 billion in commissions. We serve more than 100 markets across the U.S. and Canada and employ over 6,000 people.

For more information or to contact a local Redfin real estate agent, visit www.redfin.com. To learn about housing market trends and download data, visit the Redfin Data Center. To be added to Redfin's press release distribution list, email press@redfin.com. To view Redfin's press center, click here.

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