Buyers are finally reaching a limit to how much they are willing to pay
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The continuous increases in mortgage rates have chipped away at the purchasing power of prospective homebuyers, with the number of homes affordable to buyers across the US decreasing further as rates approach 6%, according to an analysis by Redfin.
Redfin found that a homebuyer with a monthly housing budget of $2,500 a month and a 20% down payment has lost $29,750 in purchasing power since the beginning of 2018. At the start of the year, that buyer could afford a home for as much as $473,750 when 30-year mortgage rates were averaging around 4%.
Now that rates have climbed above 4.75%, that same buyer can only afford a home priced up to $444,000.
With rates expected to continue rising into 2019, buyers will be directly affected in terms of the number of homes that they could afford.
Redfin found that there would be a 15% decline in the number of three-bedroom, two-bathroom homes for sale that a buyer with a monthly house payment budget of $3,500 could afford in Orange County, Calif., Honolulu, or San Jose if rates rose to 5.5% from 5%. The selection for the same buyer in Boston, Seattle, Los Angeles, or San Diego, would shrink by 10% to 14%.
"Every fall and winter, we see prices decline relative to spring and summer, but this year's seasonal declines have been more extreme as buyers, especially in coastal markets, are finally reaching a limit in terms of how much they are willing to pay," Redfin Chief Economist Daryl Fairweather said. "Sellers haven't quite come to terms with the fact that they no longer have buyers wrapped around their finger. This push and pull is likely to continue until early 2019 when the home-buying season picks back up."
