Homebuyers in many U.S. markets are being forced to settle for smaller homes as they confront the realities of rising mortgage rates and high asking prices.
The median-size home considered affordable to buyers with $3,000 monthly housing budgets shrunk in the past year by more than 100 square feet in most of the 50 largest markets, according to a new analysis by real estate brokerage Redfin.
Assuming the average bedroom is about 130 square feet, that means, in some cities, folks who could have afforded a three-bedroom home a year ago can now only afford a two-bedroom in the same location.
Since this time last year, the expected monthly mortgage payment has increased by 50% for a home with the median asking price, according to Redfin. That monthly payment would be $2,547 at the current interest rate of 6.7% for 30-year fixed mortgages, compared to $1,698 in 2021.
“For buyers who need a home right now — and can still afford it — compromise is the name of the game,” Sheharyar Bokhari, senior economist at Redfin, said in a Tuesday news release. “Some buyers will choose to sacrifice on location or move further away from the city center so they can get the space they want, while others will settle on a smaller home in their ideal location.”
Why the 'affordable' house is shrinking
For buyers in San Diego; Newark, New Jersey; and Nassau County, New York; the median-size affordable home on a $3,000 budget was more than 400 square feet smaller at the end of September than it was at the same time last year. In more than a dozen of the largest markets, it shrunk by at least 200 square feet.
Redfin's analysis assumes a 20% down payment on the list price of homes for sale. It factors in the change in home prices as well as the increase in mortgage rates, which have climbed from 3.01% a year ago to 6.7% last week.
Americans are facing serious "affordability obstacles" as the typical monthly mortgage payment has increased by 58.8% in the past year, real estate marketplace Zillow said in a recent report. That could lead buyers to look for smaller houses or search in cheaper neighborhood so they can stay within budget.
It's quite possible that many of today's homebuyers will end up refinancing down the road if interest rates drop drastically. But experts say you should have a long-term plan to pay your monthly bills based on the rate when you take out a mortgage. (Afer all, you never know what the future may hold.)
High mortgage rates could cause home prices to come down in the months ahead because increases in the cost of borrowing for a home purchase typically push buyers out of the market. In other words, less demand on the buyer side can cause home prices to fall.
Housing experts generally agree that the increase in mortgage rates will prevent home prices from rising sharply again in the near future like they did during the pandemic real estate boom. But housing forecasts are mixed on whether price growth will merely slow in the next year, or if a significant decline in home prices that would improve affordability is on the horizon.
Redfin’s economists say the lack of homes on the market has kept home prices from falling at a level that would offset the additional interest costs from higher mortgage rates.
At least for now, that means many buyers will need to shop for smaller homes.
In six of the biggest metro areas, the typical home that's affordable with a $3,000 monthly budget is smaller than 1,000 square feet. This time last year, that was only true for San Francisco, which is now joined by New York and four other California cities — Oakland, San Diego, San Jose and Anaheim.