Redfin Breaks Down the Cost to Homebuyers of Mortgage Rate Hikes and McLean Mortgage Shows You How to Calculate Your Options
A buyer with a $2,500 monthly housing budget lost nearly $30,000 in purchasing power this year
The number of homes affordable to a buyer in San Diego with a $3,500 monthly housing budget could shrink by more than 25 percent as mortgage rates approach 6 percent.
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SEATTLE, Oct. 23, 2018 /PRNewswire/ -- RDFN, -6.36% -- A homebuyer with a monthly housing budget of $2,500 a month and a 20 percent down payment could afford to purchase a home for as much as $473,750 at the beginning of the year when 30-year mortgage rates were averaging around 4 percent. Now that rates have climbed above 4.75 percent, that same buyer can only afford a home priced up to $444,000—a loss of $29,750 in purchasing power, according to the latest analysis by Redfin (www.redfin.com), the next-generation real estate brokerage.
Home prices in some of the hottest markets have been inching down over last few months. Prices are still higher than they were a year ago, but price growth is slowing in the coastal markets where homes are sitting on the market longer, more homes are available to choose from, and more sellers are dropping their prices.
"Every fall and winter we see prices decline relative to spring and summer, but this year's seasonal declines have been more extreme as buyers, especially in coastal markets, are finally reaching a limit in terms of how much they are willing to pay," explains Redfin chief economist Daryl Fairweather. "Sellers haven't quite come to terms with the fact that they no longer have buyers wrapped around their finger. This push and pull is likely to continue until early 2019 when the home-buying season picks back up."
For those weighing whether to buy a home now before mortgage rates tick up further or wait for seasonal price declines, Redfin published the attached chart showing how purchasing power changes as mortgage rates rise, on several different monthly housing budgets.
Rates are expected to continue rising through into 2019, which will have a direct effect on the number of homes that are affordable to buyers.
Let's say you're looking for a three-bedroom, two-bathroom home. If your monthly house payment budget is $3,500, an increase in mortgage rates from 5.0 percent to 5.5 percent would reduce the number of homes for sale that you could afford by over 15 percent in Orange County, California, Honolulu, or San Jose, California. In Boston, Seattle, Los Angeles, or San Diego, your selection shrinks by 10 to 14 percent.
With a monthly housing budget of $2,500, if rates rise to 5.5 percent, the number of listings on the market that a buyer can afford decreases by 10 to 20 percent in Sacramento, Long Island, Denver, and Portland, Oregon.
If prices actually fall next year (which is not currently expected in most markets), falling prices could offset the cost of rising mortgage rates. However, the bigger your budget, the bigger home price drops you'll need to see in order to balance out increasing mortgage rates. For example, if your budget is $2,500 a month, you would need to pay $18,000 less for your home to make up for a jump in mortgage rates from 5 percent to 5.5 percent, but if your budget is $3,500 a month, your home price needs to be $25,250 less to keep your payment the same.
To read the full report, complete with a chart showing how rising mortgage payments affect purchasing power on a number of monthly housing budgets, and a methodology, please visit: https://www.redfin.com/blog/2018/10/higher-mortgage-rates-increase-monthly-housing-costs
Redfin (www.redfin.com) is the next-generation real estate brokerage, combining its own full-service agents with modern technology to redefine real estate in the consumer's favor. Founded by software engineers, Redfin has the country's #1 brokerage website and offers a host of online tools to consumers, including the Redfin Estimate, the automated home-value estimate with the industry's lowest published error rate for listed homes. Homebuyers and sellers enjoy a full-service, technology-powered experience from Redfin real estate agents, while saving thousands in commissions. Redfin serves more than 80 major metro areas across the U.S. The company has closed more than $60 billion in home sales.
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, subscribe here. To view Redfin's press center, click here.
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