Rising Mortgage Rates May Hamper Home Buyers, Redfin Reports

If mortgage interest rates were to rise to 3.9%, a home buyer with a $2,000 monthly housing budget could afford a $382,250 home, according to a new report from Redfin. That’s down from the $396,000 home a buyer with the same budget can afford with a 3.5% rate – roughly where mortgage rates stand today.

Redfin economists predict the 30-year fixed mortgage rate will climb to 3.9% by the end of this year. Mortgage rates are expected to increase as the Federal Reserve raises interest rates in an effort to alleviate inflation. The Fed has indicated that the series of interest-rate hikes will start in March.

Last month marked the first time rates surpassed 3.5% since March 2020, when the coronavirus pandemic was just beginning. Buyers are simultaneously grappling with surging housing prices; the median home sale price jumped 14% year over year in January to $354,750.

The rise in mortgage rates so far hasn’t put a damper on intense home buyer demand. If anything, it has kept demand strong – pending home sales were up 38% in January from the same period two years earlier. A December Redfin survey found that nearly half (47%) of house hunters would feel more urgency to buy a home if mortgage rates were to rise above 3.5%, which has now happened.

“If rates were to rise much further in a typical market, we would expect there to be a turning point: Buyers would go from feeling more urgency to buy to feeling less urgency,” states Daryl Fairweather, Redfin’s chief economist. “That’s because rates would ultimately reach a point where renting is more feasible than buying. But this isn’t a typical market. Rental prices are soaring too, so instead of renting, many buyers will likely purchase more modest homes in relatively affordable places to avoid increasing their monthly budget. That means buyer demand will remain strong for at least the next month and potentially longer, even as rates and prices continue to climb.”

“With home prices and mortgage rates increasing, we might start to see buyers trading space for smaller homes that are closer to amenities,” says Redfin agent Kristin Lopez from Boise, Idaho. “So instead of purchasing large homes in the suburbs, many buyers may ‘settle’ for a smaller home or even a townhome closer to the city and then buy a bigger house later if they need more room.”

At a 3.9% interest rate, half (50.1%) of homes for sale nationwide in January were affordable for home buyers on a $2,000 monthly budget, down from 52.2% at a 3.5% interest rate. Popular migration destinations, including Austin (Texas), Atlanta and Phoenix, saw outsized declines.

In Raleigh, 46.3% of homes for sale last month were affordable with that budget at a 3.9% interest rate, down from 50.1% at a 3.5% interest rate. That 3.8-percentage point decline was the biggest drop among the 50 most populous U.S. metropolitan areas. Next came Austin (-3.5 pts), Atlanta (-3.2 pts), Phoenix (-3.1 pts) and Houston (-3.1 pts).

Many of these metros have exploded in popularity during the pandemic as home buyers with big budgets have moved in from expensive coastal cities to work remotely and get more bang for their buck. That has contributed to a surge in housing prices across the Sun Belt.

At a 3.9% interest rate, 89.4% of homes for sale in Detroit last month were affordable on a $2,000 monthly budget – the highest share among the 50 most populous metros. It was followed by Cleveland (85.4%); Buffalo, New York (83.4%); Pittsburgh (81.3%); and St. Louis (80.4%). Those same five places also had the highest share of homes affordable at a 3.5% interest rate.

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