Homebuyers have lost six figures in their buying power over the past year, thanks to soaring mortgage rates, according to a new study.
That’s the equivalent of about $140,000, according to a new report from RedFin, as mortgage rates have climbed 6% year-to-date.
“Rising interest rates are necessary to fight inflation, but they come with painful side effects, especially for homebuyers,” said Chen Zhao, head of economic research at Redfin. .
Based on a monthly budget of $3,000, a buyer can get a house for around $479,750 with a current interest rate of 6%, according to RedFin calculations.
A year ago, they could have gotten a house for around $621,000 on the same monthly budget when rates were around 3%.
Soaring rates are putting added pressure on buyers who have already faced a torrid real estate market marked by low inventory, high prices and bidding wars, said Craig Garcia, president of Capital Partners Mortgage in Coral Springs. .
“And for the people who have been in the game this year [looking for homes] they have seen their monthly payment situation deteriorate. Not only are they struggling to find a home they would like, but they are looking at a significantly higher payment than before,” he added.
For many buyers, this forces them to make adjustments to how much they can spend monthly on a home, or even what type of home or area they want to live in. Some are turning to adjustable rate mortgages in hopes of getting a cheaper initial rate and possibly refinancing in the future.
For others, it may prevent them from qualifying overall.
“Some people may have lost the ability to qualify overall. If you were very thin before – which a lot of people were, given rising property values – you may have basically been kicked out where you can’t qualify for much,” JC said of Ona, president of the Southeast Florida division for Centennial Bank. “At one point earlier this year they were fully qualified for a home in the area they were looking for, but now they can’t.”
Why are rates rising?
Mortgage rates hit a record low of around 2.6% during the housing boom, helping fuel a booming housing market as buyers surged for record rates.
Rates hovered around 3% in 2021, before starting to climb in 2022 as the Federal Reserve announced it would work to tackle rising inflation in the country.
Today, mortgage rates are the highest in about 15 years, having reached 6% in September.
It remains to be seen if rates will continue to rise and if they will continue to have a cooling effect on the housing market.
“Generally you’ll see the market cool off, but ultimately I think it will be short lived before the market picks up again,” de Ona said. “There are those who have delayed buying a house [when the rates went up]so when rates come back down, you’ll have that pent-up demand that will kickstart the market.