Homebuyers on a $2,500 Monthly Budget Stand to Lose $23,250 in Spending Power as Mortgage Rates Rise from Record Lows

Rhea-AI Summary

Redfin's latest report reveals that a homebuyer loses $23,250 in purchasing power with a mortgage rate increase to 3.25% from 2.75%. At the higher rate, a buyer can afford a $506,000 home, compared to $529,250 for the lower rate. The average mortgage rate hit 3.02% as of March 4, marking a rise after months below 3%. The report also indicates that rising rates may lead to more price-conscious buyers in the housing market.

Additionally, the affordability of homes decreased in major metros, impacting buyer options.

Positive

• Despite the increase in mortgage rates, 44% of buyers remain unfazed with their plans.
• The demand for homes, particularly affordable ones, is expected to rise due to financial relief from the stimulus package.

Negative

• The increase in mortgage rates has reduced the purchasing power of homebuyers by $23,250.
• Home affordability has decreased 1.7% nationally, with significant drops in metro areas like Denver and Sacramento.

SEATTLE, March 8, 2021 /PRNewswire/ -- (NASDAQ: RDFN) — A homebuyer would lose $23,250 in spending power with a mortgage rate of 3.25% versus a 2.75% rate, where they were sitting earlier this year, according to a new report from Redfin (www.redfin.com), the technology-powered real estate brokerage. At a 3.25% interest rate, a homebuyer can afford a $506,000 home for $2,500 per month, down from the $529,250 they could afford on the same budget with a 2.75% rate. To put it another way, the monthly payment on a $506,000 home would rise $110 with the higher mortgage rate, from $2,390 to $2,500.

Interest rates started to rise in mid-February after 30-year fixed mortgage rates reached a record low of 2.65% in the beginning of January, a continuation of five months of sub-3% rates as the Fed worked to stimulate the economy during the pandemic-driven recession. Partly as a result of record-low rates, home prices rose a near-record 14% year over year in January. The average mortgage rate hit 3.02% in the week ending March 4—the first time it has risen above 3% in seven months—and is likely to continue to increase, at least slightly, as the economy recovers.

Growth in the number of homes that have gone under contract has started to slow in recent weeks, but it's too early to tell whether the trend is a result of winter storms, a shortage of homes for sale, or rising mortgage rates or whether the trend is likely to continue into spring or not.

"If the $1.9 trillion economic stimulus package that's set to provide cash relief to Americans and get people back to work is successful, interest rates are likely to inch back up to pre-pandemic levels of about 3.5%. That would alter the dynamics of the housing market, though it wouldn't necessarily put a damper on it," said Redfin Chief Economist Daryl Fairweather. "The financial relief coming to families earning less than $150,000 will give more of them the desire and means to buy a home. That will result in more demand for affordable homes. That's different from what we're seeing now, which is a housing market driven by wealthy people purchasing relatively expensive homes. Higher mortgage rates will also make buyers more price conscious and less likely to bid 10% or more over asking, so we could see some of the intense competition slow down."

Forty-four percent of respondents to a recent Redfin survey said mortgage rates rising above 3.5% would have no impact on their homebuying plans, while 10% would cancel their plans to buy a home.

"The small increase in mortgage rates has had zero impact on buyers so far," said Seattle Redfin agent Ben Stanfield. "Rates are still historically low and they're still keeping buyers in the market. Even though rates are creeping up, they're not increasing nearly as quickly as home prices. If you can buy, it's a good idea to buy now before homes become even more expensive."

With a 3.25% interest rate, 68.4% of homes nationwide that were for sale any time between January 26 and February 25 were affordable on a $2,500 monthly budget. With a 2.75% rate, 70.1% of homes were affordable on that budget.

"Over the next few months, it will be important to keep an eye on inflation," Fairweather said. "Inflation has the potential to change every aspect of homebuyers' finances: It could change earnings, change budgets and change mortgage rates."

Buyers have fewer options with a 3.25% interest rate in every metro—especially Denver, Sacramento and Riverside

With a 3.25% interest rate, 52.5% of homes for sale in Denver between January 26 and February 25 were affordable on a $2,500 monthly budget, versus 56.3% with a 2.75% rate. In Sacramento, 47% of homes for sale were affordable with a 3.25% rate, versus 50.6% with a 2.75% rate. The 3.7 percentage-point difference in each of those places is bigger than any other metro. Next comes Riverside, CA, with a 3.4 percentage-point difference (57.3% versus 60.7%).

Birmingham, Cleveland and Detroit each have just a 0.4 percentage-point difference in the share of homes affordable with the two different interest rates. In Birmingham, 87.3% of homes for sale were affordable on a $2,500 monthly budget with a 3.25% rate, just slightly fewer than 87.7% with a 2.75% rate. In Cleveland it's 92% versus 92.4%, and in Detroit it's 92.9% versus 93.3%.

Share of homes for sale affordable on a $2,500 monthly mortgage budget, 2.75% interest rate versus 3.25% interest rate
Metro area	Share of homes affordable on a $2,500 payment @ 2.75%	Share of homes affordable on a $2,500 payment @ 3.25%	Change in share of homes affordable, 2.75% vs. 3.25%
Atlanta, GA	79.5%	77.7%	-1.7 pts
Austin, TX	65.5%	63.3%	-2.2 pts
Baltimore, MD	80.2%	78.5%	-1.7 pts
Birmingham, AL	87.7%	87.3%	-0.4 pts
Boston, MA	36.5%	33.8%	-2.7 pts
Buffalo, NY	92.8%	92.0%	-0.7 pts
Charlotte, NC	79.9%	78.4%	-1.5 pts
Chicago, IL	76.3%	74.7%	-1.6 pts
Cincinnati, OH	86.4%	85.6%	-0.8 pts
Cleveland, OH	92.4%	92.0%	-0.4 pts
Columbus, OH	88.6%	87.4%	-1.2 pts
Dallas, TX	77.6%	75.4%	-2.1 pts
Denver, CO	56.3%	52.5%	-3.7 pts
Detroit, MI	93.3%	92.9%	-0.4 pts
Hartford, CT	88.0%	86.7%	-1.3 pts
Houston, TX	80.6%	79.1%	-1.4 pts
Indianapolis, IN	90.6%	89.6%	-1.0 pts
Jacksonville, FL	83.7%	82.7%	-1.0 pts
Kansas City, MO	84.8%	83.5%	-1.3 pts
Las Vegas, NV	79.7%	78.0%	-1.7 pts
Los Angeles, CA	17.6%	15.8%	-1.8 pts
Louisville, KY	90.1%	89.5%	-0.6 pts
Memphis, TN	89.1%	88.1%	-1.0 pts
Miami, FL	61.3%	59.5%	-1.7 pts
Milwaukee, WI	89.0%	88.1%	-0.9 pts
Minneapolis, MN	79.6%	77.5%	-2.1 pts
Nashville, TN	75.5%	73.6%	-1.9 pts
New Orleans, LA	80.6%	79.2%	-1.4 pts
New York, NY	33.9%	32.0%	-1.9 pts
Oklahoma City, OK	88.6%	87.7%	-0.9 pts
Orlando, FL	83.0%	81.6%	-1.3 pts
Philadelphia, PA	82.0%	80.6%	-1.5 pts
Phoenix, AZ	70.7%	68.9%	-1.8 pts
Pittsburgh, PA	89.1%	88.4%	-0.7 pts
Portland, OR	58.5%	55.3%	-3.2 pts
Providence, RI	77.4%	76.0%	-1.4 pts
Raleigh, NC	81.8%	80.2%	-1.7 pts
Richmond, VA	82.7%	80.9%	-1.8 pts
Riverside, CA	60.7%	57.3%	-3.4 pts
Sacramento, CA	50.6%	47.0%	-3.7 pts
Salt Lake City, UT	56.8%	54.4%	-2.4 pts
San Antonio, TX	86.5%	85.1%	-1.4 pts
San Diego, CA	23.1%	20.6%	-2.6 pts
San Francisco, CA	4.8%	3.8%	-0.9 pts
San Jose, CA	4.6%	3.9%	-0.7 pts
Seattle, WA	30.7%	28.0%	-2.7 pts
St. Louis, MO	89.6%	88.8%	-0.7 pts
Tampa, FL	81.4%	80.2%	-1.1 pts
Virginia Beach, VA	89.3%	88.2%	-1.1 pts
Washington, DC	58.7%	55.8%	-2.9 pts
National	70.1%	68.4%	-1.7 pts

 

To read the full report, including methodology and an interactive chart that shows how much a homebuyer can afford to spend at different mortgage interest rates, please visit: https://www.redfin.com/news/rising-mortgage-rates-decrease-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 nationwide brokerage website, offering a host of online tools to consumers, including the Redfin Estimate. We represent people buying and selling homes in over 95 markets in the United States and Canada. Since our launch in 2006, we have saved our customers nearly $1 billion and we've helped them buy or sell more than 310,000 homes worth more than $152 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.

View original content to download multimedia:http://www.prnewswire.com/news-releases/homebuyers-on-a-2-500-monthly-budget-stand-to-lose-23-250-in-spending-power-as-mortgage-rates-rise-from-record-lows-301241860.html

SOURCE Redfin

FAQ

What is the impact of rising mortgage rates on homebuyers according to Redfin's March 2021 report?

According to Redfin, rising mortgage rates decrease purchasing power significantly, with buyers losing $23,250 at a rate of 3.25% compared to 2.75%.

How much can a buyer afford with a 3.25% mortgage rate?

With a 3.25% mortgage rate, a buyer can afford a home priced at $506,000.

What was the average mortgage rate as of March 4, 2021?

The average mortgage rate hit 3.02% in the week ending March 4, 2021.

How has the rise in mortgage rates affected home affordability in major metro areas?

The rise in mortgage rates has decreased home affordability, particularly in cities like Denver and Sacramento, where drops are more pronounced.

What percentage of homes were affordable on a $2,500 budget with a 3.25% interest rate?

With a 3.25% interest rate, 68.4% of homes were affordable on a $2,500 monthly budget.