Homebuyer budgets increased a measly +0.3% y/y,  according to a just released Redfin survey of its online home searchers.

Flat Homebuyer Budget Growth Could Slow Home Price Growth

According to Redfin, homebuyer budgets peaked at a growth rate of +12.2% in April 2021.  Simultaneously, home-sale prices peaked to a record +22.6% y/y in July 2021.

Present tense:  homebuyer budget growth began slowing at the beginning of 2022 and has been declining ever since to just +0.3% y/y during the three months ending April 30.  Simultaneously, mortgage rates are now sitting at a range of 5.2% – 6.13% after record-fast rate increases that began at the beginning of 2022.

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The result of this disparity between the growth of homebuyer budgets and of home prices?  Realtor.com reported that 21% of home sellers dropped their asking price on their for-sale listing during the last four weeks in April.

Seesaw Effect of Increasing Mortgage Rates

Redfin Deputy Chief Economist Taylor Marr said, “When mortgage rates go up, buyers’ budgets go down.  And when buyers’ budgets go down, sellers have to meet buyers where they are.

“Budgets haven’t fallen from a year ago and we don’t expect home-sale prices to fall either.  But the fact that budget growth has slowed so significantly is one sign among many that home-price growth will continue to slow as the year goes on.”

As a comparison, a home buyer on a $2,500 monthly budget could afford a house priced at $517,500 when interest rates were 3% at the beginning of 2022.  Now, a home buyer with that same $2,500 monthly budget can afford a house priced at $427,250 with interest rates at 5.2%.  Obviously, the higher the interest rate, the less house the home buyer can afford.

Typical Buyers Highly Sensitive to Interest Rate Hikes

Even as more sellers are dropping their listing prices, most typical buyers can’t see their way clear of rising interest rates.

These buyers still want to buy but now they’re being forced by rising interest rates to refine their searches for less expensive homes…if, in fact, they can still afford to buy less expensive homes as rates climb higher and higher.

Thanks to Redfin.

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