Raising rates is necessary to fight inflation, but buyers may need to get creative to afford a home with high monthly mortgage payments.
A homebuyer on a $3,000 monthly budget can afford a $479,750 home with today’s 6% mortgage rates, down from the $621,000 home they could have bought a year ago when 3% rates were the norm.
Put another way, this homebuyer has lost $140,000 in spending power this year as mortgage rates have doubled to their highest level in nearly 15 years. Mortgage rates have been rising since January as the U.S. Federal Reserve seeks to curb inflation. The Fed most recently instituted a sharp interest-rate hike–its third in a row–on Wednesday, and signaled that it plans to further increase rates at upcoming meetings.
High mortgage rates are causing both buyers and sellers to back off, cooling the overall housing market to its slowest pace since the beginning of the pandemic. While buyers are facing much less competition than they were at the height of the pandemic-driven demand boom, high prices and high rates are cutting deeply into their budget, making it hard to find a home they want at a price they can afford. Sellers, hesitant to list their homes into an environment with diminished demand, are also motivated to stay put because they don’t want to give up their own relatively low mortgage rates.
“Raising interest rates is necessary to fight inflation, but it comes with some painful side effects–especially for homebuyers,” said Redfin Economics Research Lead Chen Zhao. “Mortgage rates may not rise much more in the near term, as they were already baked in expectations of today’s Fed meeting, but mortgage rates have doubled this year and are likely to remain high barring the onset of a recession. That leaves buyers who didn’t lock in a relatively affordable monthly mortgage payment to contend with high home prices, high mortgage rates and a lack of homes to choose from. I expect high interest rates, likely to climb even higher by the end of the year, to cool the stock market and eventually the labor market too–especially because the Fed has indicated that they’re prioritizing fighting inflation over economic growth. That could further chill the housing market–but it could also put some downward pressure on prices, which would give buyers some relief.” “Those who need to buy a home in today’s market may need to get creative to afford one,” Zhao continued. “Prospective buyers should talk to a loan officer to understand their options, which include adjustable-rate mortgages and potentially refinancing when rates eventually do come down.”