As interest rates rise, a good chunk of homebuyers have lost up to $165,000 in purchasing power on new homes in the last year, according to a recent study by online real estate brokerage Redfin.
Interest rates for 30-year fixed-rate mortgages have jumped from an average low of 3% to about 6% in the last year alone. Because of those rate hikes, mortgage costs have shot up by a median increase of 49%. This has resulted in potential homebuyers being able to afford less on the same budget, Redfin finds.
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At the end of 2021, a homebuyer with a monthly mortgage budget of $2,500 could afford a home worth up to $517,500. But for the four-week period ending June 15, 2022, that same homebuyer could only afford a home worth up to $399,750 — a $120,000 drop in purchasing power. The median monthly mortgage payment in the U.S. is $2,391 as of June, per Redfin's data.
Even homeowners able to spend more than that are seeing diminishing value in the homes they can purchase. Buyers with monthly mortgage budgets of $3,000 or $3,500 have lost $141,250 and $165,000 in buying power, respectively, the study finds.
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Redfin's data makes a few assumptions: the mortgages include a 20% down payment, a 1.25% property tax rate, a 0.5% homeowners insurance rate and no homeowners association dues.
"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," writes Redfin's chief economist Daryl Fairweather in a blog post accompanying the data.
For sellers, "smaller homebuyer budgets mean they can no longer expect to get top dollar for their home."
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The study also looked at the share of homes that are affordable on a $2,500 monthly budget by metro area. With a jump in interest rates from 3% to 6%, the nationwide share of affordable homes fell by 16%.
However, the biggest drops in affordability were in places that became popular homebuying markets during the pandemic, and are often known for their low cost of living: Phoenix, Raleigh, Las Vegas, Salt Lake City and Austin.
Expensive real estate markets like the Bay area or New York saw the smallest decrease in affordability, but only because those markets already had limited affordability for monthly mortgage budgets of $2,500.
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