Homebuyers on a $2,500 Monthly Budget Can Afford $33,000 More With Low Mortgage Rates, But Higher Home Prices Cancel Out Increase

Rhea-AI Summary

According to a new report from Redfin (NASDAQ: RDFN), homebuyers with a $2,500 monthly budget can afford a home priced $33,250 higher than last year due to historically low mortgage rates. At a 3% mortgage rate, buyers can afford a $516,500 home, compared to $483,250 in July 2019, marking a 6.9% increase in purchasing power. However, the share of affordable homes has decreased, with only 70.6% being accessible on that budget in July 2020, down from 71.9% in July 2019.

Positive

• Homebuyers can afford $33,250 more due to low mortgage rates.
• Purchasing power increased by 6.9% from last year.

Negative

• Share of homes affordable on a $2,500 budget decreased to 70.6%.
• Home prices are rising faster than purchasing power due to competition.

SEATTLE, Sept. 3, 2020 /PRNewswire/ -- (NASDAQ: RDFN) — A homebuyer with a $2,500 monthly housing budget can afford a home priced $33,250 higher than a year ago, thanks to historically low mortgage rates, according to a new report from Redfin (www.redfin.com), the technology-powered real estate brokerage.

At a 3% mortgage interest rate—roughly the average 30-year fixed rate for July and August 2020—a homebuyer can afford a $516,500 home on $2,500 per month, up from the $483,250 they could afford on the same budget when the average was 3.77% in July 2019.

The $33,250 rise in purchasing power from last year (from $483,250 to $516,500) is a 6.9% increase. The 8.2% year-over-year home-price increase in July, the largest rise in more than two years, was higher. Historically low mortgage rates are responsible for both: They push up homebuyer demand, which leads to an uptick in home prices. Those are the intended results, as the Fed is using low interest rates to stimulate the economy during the pandemic-driven recession.

"Low mortgage rates are motivating many people to purchase a home, particularly those who want more space to work from home," said Redfin chief economist Daryl Fairweather. "But because there hasn't been an increase in the number of homes for sale since rates started dropping with the onset of the pandemic, many buyers end up competing for the same homes, driving up prices. Those competing forces make the current market a wash for many buyers looking for single-family homes in competitive areas. Buyers searching for condos can find a better deal, both on overall price and mortgage payments, because most condos are less competitive than single-family homes as people move out of densely populated urban areas."

The continuing housing supply shortage means there are fewer affordable homes for sale for someone with a $2,500 monthly budget than last year. In July 2020, 70.6% of homes nationwide were affordable on that budget, down slightly from 71.9% in July 2019.

Despite bigger budgets, buyers have fewer options in many metros

There were fewer homes for sale on a $2,500 monthly budget than last year in the majority of metros Redfin analyzed. Salt Lake City (-5.2 percentage points), Kansas City (-3.7), Austin (-3.2) and Boston (-3) saw the biggest declines in the share of affordable homes for sale. Miami (+2.1), Jacksonville (+2), Columbus (+2) and Milwaukee (+2) experienced the biggest increases.

In Providence, Rhode Island, where the share of affordable homes has declined 1.5 percentage points since last year, Redfin agent Lisa Bernardeau says low rates are the primary motivation for buyers right now.

"Back in June, homebuyers thought they could take advantage of low rates and get a good deal because of the pandemic. Now they're seeing that's not the case because inventory is so tight and there's so much competition, but most buyers are still powering through. Regardless of high prices, a lot of buyers have been watching the market and they don't want to miss out on historically low rates or risk prices going even higher. Low interest rates are the number one driver right now."

To view the full report, including charts and methodology, please visit: https://www.redfin.com/blog/low-mortgage-rates-increase-purchasing-power/

About Redfin
Redfin (www.redfin.com) is a technology-powered residential real estate company, redefining real estate in the consumer's favor in a commission-driven industry. We do this by integrating every step of the home buying and selling process and pairing our own agents with our own technology, creating a service that is faster, better and costs less. We offer brokerage, iBuying, mortgage, and title services, and we also run the country's #1 real estate brokerage search site, offering a host of online tools to consumers, including the Redfin Estimate. We represent people buying and selling homes in over 90 markets in the United States and Canada. Since our launch in 2006, we have saved our customers over $800 million and we've helped them buy or sell more than 235,000 homes worth more than $115 billion.

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, email press@redfin.com. To view Redfin's press center, click here.

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SOURCE Redfin

FAQ

What is the impact of low mortgage rates on homebuyers in 2020?

Low mortgage rates have increased the purchasing power of homebuyers by allowing them to afford homes priced $33,250 higher than last year.

How much can you afford with a $2,500 monthly budget?

With a $2,500 monthly budget at a 3% mortgage rate, buyers can afford a home priced at $516,500.

What was the share of affordable homes for $2,500 budget in July 2020?

In July 2020, only 70.6% of homes were affordable for buyers with a $2,500 monthly budget.

How did home prices change from July 2019 to July 2020?

Home prices increased by 8.2% year-over-year in July 2020.

What challenges are homebuyers facing in the current market?

Homebuyers are facing fewer affordable options as competition drives up prices, despite having larger budgets due to low mortgage rates.