As the United States Federal Reserve continue to increase the interest rate, a great number of newly homebuyers in the United States have lost up to 165,000 USD in purchasing power on new homes.
As a result of the rise in interest rate, interest rates for 30-year fixed-rate mortgages have jumped from an average low of 3 percent to about 6 percent in 2021 alone. Because of those rate hikes, mortgage costs have increased a median high of 49 percent. This has resulted in potential homebuyers being able to afford less on the same budget.
How Home Buyers Are Affected
Before the interest rate hike, an homebuyer with a monthly mortgage budget of 2,500 USD could afford a home worth up to 517,500 USD. However, in 2022, that same homebuyer could only afford a home worth of 399,750 USD, a 120,000 USD decrease in purchasing power.
Even some homeowners who able to spend more than that are seeing diminishing value in the homes they can purchase. For example, buyers with monthly mortgage budgets of 3,000 USD or 3,500 USD have lost 141,250 USD and 165,000 USD in buying power, respectively.
The above data makes a few assumptions: the mortgages include a 20 percent down payment, a 1.25 percent property tax rate, a 0.5 percent homeowners insurance rate and no homeowners association dues.
Many people who are searching to buy a new house, after the interest rate hike, need to consider smaller homes, perhaps farther from their ideal neighbourhood or stick to renting if they’re priced out of the market altogether.
We can look also at the share of homes that are affordable on a 2,500 USD monthly budget by metro area. With a jump in interest rates from 3 percent to 6 percent, the nationwide share of affordable homes lowered by 16 percent. The rising of interest rate could lead to a situation that:
- The new buyer may be qualifying for a lower loan amount.
- May have difficulty finding homes in his or her price range.
- Higher rates mean higher mortgage payments.
- With property values going up as fast as they are, the cost of rent goes up faster than mortgage payments, even with higher rates.
However, the biggest drops in affordability were in places that became popular markets during the COVID-19 pandemic, such as Phoenix, Raleigh, Las Vegas, Salt Lake City and Austin, and are often known for their low cost of living.
Expensive real estate markets, such as New York, saw the smallest decrease in affordability, but only because these markets already had limited affordability for monthly mortgage budgets of 2,500 USD.
How Home Sellers Are Affected
For home sellers, smaller homebuyer budgets mean they can no longer expect to generate revenues or customers for their home, therefore:
- There may be fewer customers
- The sellers might have a harder time finding a new home
- The home may not sell for high price
What The Buyer Can Do
The better your financial situation prior to applying for a mortgage, the easier it will be to qualify for a lower interest rate and a larger loan. With that in mind, take the following steps to improve your financial fitness:
- Pay down existing debt
- Improve your credit score
- Build your savings for a down payment
- Look for ways to trim your budget