High Mortgage Rates Implications: Buyers Are Losing Spending Power

October 3rd, 2023  / Author: Cesar Gomez

As the rate for the most popular loan - the 30-year fixed mortgage - approaches 6% this month, both sellers and buyers are having trouble maneuvering through the market. Sellers are settling unmotivated to sell because they might be getting a higher rate upon buying a new property. However, potential buyers are having it worse, because they are losing hundreds of thousands in spending power.

The right way of calculating the affordability of the property is by establishing the monthly budget. A person’s monthly budget is the part of their salary available for homeowning costs, including mortgage installments, insurance, and taxes. Budgets rarely change drastically in a short period of time, but the changes in the market are happening all the time.

What Are Buyers’ Options?

Many house hunters have the same budget today as six months ago. Meanwhile, housing prices have increased, as have the interest rates, which seriously cut the spending power of people who waited for the competition to dry out. With the average mortgage rate above 5.8%, certain buyers have lost $120,000 of spending power, some even more.

Redfin did the math and compared the spending power of an average buyer today and six months ago. Let’s say that an average buyer has no more than $2,500 for homeowning costs available each month.

That budget can grant them a house worth $517,000 if the mortgage rate is 3% - like it was at the end of last year. However, with today’s rates, the same homebuyer with the same budget can buy a house worth $399,000, almost $120,000 less.

Therefore, buyers have three options as they are getting priced out by home values and increasing rates. One is to lower their standards - maybe finding a smaller property, with fewer amenities, in a not-as-pristine condition. The second option is to move their interest elsewhere and look for a property in another neighborhood.

And the last option is to postpone the home buying process hoping that the market changes for the better. Being priced out of the market usually lead to would-be homeowners opting for renting, as they cannot find a house in their price range.

National Affordability Prospects

Redfin did a comparative analysis of national affordability rates, taking average borrowers as an example. The same borrower mentioned earlier, with a $2.500 monthly budget, can afford 45.6% of houses on the market today. Six months ago they could afford 61.6% of houses - they lost the spending power for 20% of the market.

The Sun Belt States saw the biggest drop in affordability since the rates started increasing, especially in metro areas that were popular among the pandemic homebuyers. Phoenix, Raleigh, Las Vegas, Salt Lake City, and Austin have the biggest difference in the number of affordable houses.

Less than one-third of all listed properties in these cities are affordable for the average buyer. The biggest gap is in Phoenix, where someone with a $2,500 monthly budget could afford more than 50% of the market in 2021. Today, the same person can afford only 21% of all the listings.

The goal of the rate rises is to push out the competition and calm down the inflation, which is at a record high point. However, the disadvantage of this otherwise good tactic is that it targets people in unfavorable financial situations first, while those who have wealth get through with non or few scratches.



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