Homebuyers with a monthly budget of $2,500 lost $118,000 in spending power in 2022, according to a report released Tuesday.
The rapid decline in spending power for individuals and families on a $2,500 monthly budget comes as mortgage rates have nearly doubled since the end of 2021, according to a report from Redfin. The tech-powered real estate brokerage explained that a buyer can afford a $399,750 home at a 6% mortgage rate, which is $117,750 less than the $517,500 home the same budget could have purchased at the end of 2021.
Less than half of all homes in America are affordable at a $2,500 monthly budget with the current 6% mortgage rate, according to Redfin. With a 3% mortgage rate, more than 60% of available homes would be affordable to the same demographic, the report continued.
Homebuyers in cities like Phoenix, AZ; Raleigh, NC; Las Vegas, NV; Salt Lake City, UT and Austin, TX have less than a third of the options for purchase than they had a year ago at $2,500 a month in mortgage budgeting, Redfin noted. (RELATED: The Guy Who Presided Over The 2007-2008 Financial Crisis Now Says There Will Be No 1970s-Style ‘Stagflation’)
“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,” Redfin Chief Economist Daryl Fairweather said, according to the report. “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.”
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Mortgage rates have risen steadily since January, largely due to the Federal Reserve’s battle against exploding inflation, Redfin continued. The average 30-year fixed mortgage rate climbed from 5.23% to 5.78%, the largest jump since 1987, Redfin noted, as a result of the Fed’s interest rate hike.
The analysis was based on homes for sale from May 15 to June 15, assuming that buyers have a 20% down payment on a 30-year mortgage with 1.25% property tax, a 0.5% homeowners insurance rate, and no homeowners association dues, the report noted.