Rising mortgage rates have reduced the square footage that homebuyers can afford—leaving them with less house for higher payments.
Key Details
- In most metropolitan areas, 6.7% mortgage rates have cut out at least 100 square feet from buyer’s potential homes.
- Rising mortgage rates should cause home prices to fall, canceling out the effect rates have on buyers’ budgets, however, home prices have remained stubbornly high.
- Low inventory levels are driving the current high price rates, but high mortgage rates push most homes out of potential buyers’ price ranges.
Why it’s news
It’s a contradictory time in the housing market. Inventory is at record lows, yet sales have dropped 8% as of May. Mortgage rates are rapidly rising, yet home sales are significantly higher than last year.
The volatile nature of the housing market has been frustrating for buyers, and now they can’t even expect to get the same amount of house for their money as they once did.
Real estate company Redfin conducted an analysis of how far a buyer’s budget would take him in certain metro areas. San Diego is an example of one of the most dramatic changes.
For a buyer with a $3,000 a month budget, high interest rates and home prices have cut out more than 400 square feet of an affordable home in the San Diego area.
Last year, that same buyer could have purchased a 1,366 square foot home with a 3% mortgage rate. Now, he’s looking at 931 square foot homes with 6.7% mortgage rates.
The Redfin analysis assumes the buyer has placed a 20% down payment and doesn’t account for additional costs including taxes, insurance, and HOA fees, meaning a buyer’s budget could afford even less.
San Diego home prices were 7% higher year over year in August. If a buyer purchased a San Diego home at the current median home price, his monthly payment would be around $5,000. Last year that monthly payment would have been around $3,500.
For buyers who can still afford to buy a home, they may be looking at changing priorities, such as selecting properties further from the city and work locations.
The trends in the housing market aren’t likely to turn more favorable for buyers until the Federal Reserve’s interest rate hikes are concluded.
Surprising statistics
San Diego is the most dramatic example of the loss in home size, but it certainly isn’t the only city affected. Here is the amount of square footage lost in these top cities. . .
- San Diego, 435
- Newark, 431
- Nassau County, New York 412
- Denver, 362
- Portland, Oregon 296
- Seattle, 291
- San Jose, California 285
- Riverside, California 275
- Sacramento, California 274
- New Brunswick, New Jersey 272
