Share of homes available to buyers is falling fast as mortgage rate climbs

Rising mortgage rates could soon sharply reduce the share of homes available to a typical American couple on a fixed $2,000-per-month budget, according to a new study from Redfin.

If mortgage rates rise to 3.9 percent by the end of the year, as Redfin predicts in a study released Wednesday, couples tied to such a budget would be able to afford homes valued at approximately $382,250, down from the $396,000 property a similar family can afford now with the 30-year fixed mortgage rate hovering around 3.5 percent today, according to the analysis.

“Put another way,” the report states, “the monthly payment on a $382,250 home would rise $69 with the higher mortgage rate, to $2,000 from $1,931.

Mortgage rates are expected to continue increasing as the federal reserve raises interest rates to combat rising inflation. January 2022 marked the first time rates surpassed 3.5 percent since March 2020, when the coronavirus pandemic began spreading across the United States. At the same time, housing prices have surged to new highs, with the median home sale jumping 14 percent year over year in January, to $354,750.

Imminently rising rates have not yet put a damper on homebuyer demand as buyers have sought to act quickly before rates rise. Low inventory and inflation are causing rents to rise, too, meaning buyers who may have once resorted to renting once rates became less affordable may still seek to buy a modest home in a more affordable area because the difference in monthly costs is negligible, according to Redfin’s economists.

“If rates were to rise much further in a typical market, we would expect there to be a turning point: Buyers would go from feeling more urgency to buy to feeling less urgency. That’s because rates would ultimately reach a point where renting is more feasible than buying,” Redfin Chief Economist Daryl Fairweather said in a statement. “But this isn’t a typical market. Rental prices are soaring too, so instead of renting, many buyers will likely purchase more modest homes in relatively affordable places to avoid increasing their monthly budget. That means buyer demand will remain strong for at least the next month and potentially longer, even as rates and prices continue to climb.”

Redfin

With the forecasted rise in mortgage rates applied, Redfin found that Raleigh, North Carolina, Austin, Texas, and Atlanta, Georgia would see the biggest reduction in homes affordable to a couple on a $2,000 budget. In Raleigh, 46.3 percent of homes for sale last month would be affordable to a couple on a $2,000 budget at a 3.9 percent mortgage rate, a decrease of 3.8 percent from the previous month, while Austin had a decline of 3.5 points and Atlanta 3.2.

Kristin Lopez, a Redfin agent in Boise, Idaho, similarly predicted rising rates would lead buyers to sacrifice space for convenience when possible.

“With home prices and mortgage rates increasing, we might start to see buyers trading space for smaller homes that are closer to amenities,” Lopez said. “So instead of purchasing large homes in the suburbs, many buyers may ‘settle’ for a smaller home or even a townhome closer to the city and then buy a bigger house later if they need more room.”

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