With a 6% interest rate, homebuyers have fewer options to buy a home in all 50 of the most populous US metros.
Surge in Mortgage Rates Has Narrowed Homebuyers’ Options
A homebuyer on a $2,500 budget can afford to buy a home priced at $399,750 with a 6% mortgage. Just six months ago, that same homebuyer on that same $2,500 budget could have afforded to buy a home priced at $517,500 with a 3% mortgage rate.
In just 6 months, homebuyers have lost nearly $120,00 in spending power now that rates have nearly doubled. That loss of spending power will only increase as the Federal Reserve continues to raise interest rates in its efforts to curb inflation.
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Impact of Interest Rates Nearly Doubling
Redfin’s analysis of for-sale homes from May 15 – June 15 indicates that nationwide, 45.6% of for-sale homes are affordable on a monthly budget of $2,500 with a 6% interest rate. Contextually, if interest rates were still at 3% as they were in December 2021, those same homebuyers with that same monthly budget were able to afford 61.6% of for-sale homes.
“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 may 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.”
Affordability Rates at Various Home Price Points
Assuming a 6% interest rate, 20% down payment, 30-year mortgage, 1.25% property tax rate, 0.5% homeowners insurance rate, and no HOA fees, take a look at respective home prices and monthly payments:
- $950,000 home = $3,500 monthly payment
- $750,000 home = $3,000
- $625,000 home – $2,500
- $500,000 home = $2,000
- $375,000 home = $1,500
- $250,000 home = $1,000
Fewer Options to Buy in Pandemic Hotspots
Take a look at the comparable percentages of homes considered affordable in just five pandemic hotspots with 3% interest rates and 6% interest rates:
- Phoenix – 50% of for-sale homes affordable at 3%; 21.5% at 6%
- Raleigh – 61.1% of for-sale homes affordable at 3%; 33.2% at 6%
- Las Vegas – 56.7% of for-sale homes affordable at 3%; 30.7% at 6%
- Salt Lake City – 36.4% of for-sale homes affordable at 3%; 11% at 6%
- Austin – 38.4% of for-sale homes affordable at 3%; 13.6% at 6%
Metros Where Homebuyers Least Affected by Rising Mortgage Rates
Let’s face it – there are some metros in the nation where homes are simply out of the question on a $2,500 monthly budget regardless the interest rate. And, there are other metros, Detroit for example, where homes are mostly affordable no matter the interest rate.
Take a look at the metros where homes are virtually unaffordable regardless of market conditions:
- San Jose – 1.6% of for-sale homes at 3%; 0.1% at 6%
- San Francisco – 3.8% of for-sale homes at 3%; 1.6% at 6%
- San Diego – 9% of for-sale homes at 3%; 2.8% at 3%
- Seattle – 13.3% of for-sale homes at 3%; 5.7% at 3%
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Thanks to Redfin.