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.

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.

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. In San Jose, virtually no for-sale homes (0.1%) are affordable with a 6% rate, compared with 1.6% with a 3% rate, and in San Francisco it’s 1.6%, compared with 3.8%. Next come Detroit (87.1% are affordable at a 6% rate; 92.8% would be affordable at a 3% rate), San Diego (2.8% at a 6% rate; 9% at a 3% rate) and Seattle (5.7% at a 6% rate; 13.3% at a 3% rate).

Share of Homes Affordable on a $2,500 Monthly Budget, By Metro Area (May 15-June 15, 2022)

Metro AreaShare of Homes Affordable on a $2,500 Payment @ 3%Share of Homes Affordable on a $2,500 Payment @ 6%Change in Share of Homes Affordable, 3% vs 6%Total Homes for Sale, May 15 – June 15
Atlanta, GA67.0%45.2%-21.7 pp21,914
Austin, TX38.4%13.6%-24.9 pp10,919
Baltimore, MD74.3%58.6%-15.7 pp9,180
Birmingham, AL84.3%71.8%-12.5 pp4,309
Boston, MA23.0%9.2%-13.8 pp12,788
Buffalo, NY90.3%82.3%-8.0 pp2,645
Charlotte, NC68.1%47.3%-20.7 pp10,182
Chicago, IL76.2%62.3%-13.9 pp37,131
Cincinnati, OH83.0%71.3%-11.7 pp8,288
Cleveland, OH89.3%81.6%-7.7 pp6,941
Columbus, OH80.9%65.7%-15.1 pp7,665
Dallas, TX56.3%34.5%-21.8 pp16,615
Denver, CO27.7%12.1%-15.6 pp10,854
Detroit, MI92.8%87.1%-5.8 pp6,131
Hartford, CT82.3%68.8%-13.6 pp3,906
Houston, TX72.1%54.4%-17.7 pp27,257
Indianapolis, IN85.5%71.2%-14.3 pp6,957
Jacksonville, FL69.4%50.9%-18.6 pp7,440
Kansas City, MO76.9%63.3%-13.6 pp7,221
Las Vegas, NV56.7%30.7%-26.0 pp10,544
Los Angeles, CA11.2%3.5%-7.6 pp17,558
Louisville, KY86.5%75.1%-11.4 pp4,099
Memphis, TN84.8%71.1%-13.6 pp4,053
Miami, FL42.0%26.6%-15.4 pp13,112
Milwaukee, WI81.0%68.3%-12.7 pp5,961
Minneapolis, MN71.5%50.5%-21.0 pp13,386
Nashville, TN51.5%30.5%-21.0 pp9,841
New Orleans, LA78.7%65.8%-12.9 pp4,401
New York, NY28.7%18.4%-10.2 pp36,039
Oklahoma City, OK84.6%72.1%-12.5 pp5,082
Orlando, FL66.5%41.8%-24.6 pp9,802
Philadelphia, PA82.9%72.6%-10.2 pp8,507
Phoenix, AZ49.7%21.5%-28.2 pp20,480
Pittsburgh, PA88.0%79.6%-8.4 pp9,669
Portland, OR36.4%11.8%-24.7 pp7,702
Providence, RI63.9%41.2%-22.7 pp4,855
Raleigh, NC61.1%33.2%-27.9 pp5,938
Richmond, VA77.7%59.5%-18.2 pp3,544
Riverside, CA37.9%17.3%-20.7 pp15,330
Sacramento, CA29.3%10.8%-18.6 pp6,631
Salt Lake City, UT36.4%11.1%-25.3 pp3,568
San Antonio, TX74.9%58.2%-16.7 pp8,471
San Diego, CA9.0%2.8%-6.2 pp6,547
San Francisco, CA3.8%1.6%-2.2 pp3,075
San Jose, CA1.6%0.1%-1.5 pp3,409
Seattle, WA13.3%5.7%-7.6 pp9,703
St. Louis, MO88.5%78.8%-9.8 pp8,829
Tampa, FL66.6%44.8%-21.8 pp13,079
Virginia Beach, VA83.0%66.3%-16.7 pp6,437
Washington, D.C.46.5%27.1%-19.4 pp16,953
National61.6%45.6%-16.0 pp945,192

Methodology

The home prices listed in the interactive chart and examples above are calculated based on the maximum loan a buyer could pay with the given monthly payments, assuming a 20% down payment plus property taxes (1.25% rate) and insurance (annual premium 0.5% of home value). HOA dues were not included in the calculations. We used mortgage rates of 6% and 3% for the comparisons included in the text of this report. We used asking prices to determine the share of homes affordable.

Originally on Realtor.com Read More

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