Rising mortgage rates are stripping homebuyers of their spending power.
Today, a buyer with that budget can afford a home that costs $399,750, according to Redfin. At the end of last year, that same buyer would have been able to afford a house priced at $517,500.
That enormous loss of buying power comes thanks to a rapid spike in the cost of borrowing. Mortgage rates were hovering around 3% — a historic low — at the end of 2021. Today, they’re nearing 6% as the Federal Reserve doubles down on its effort to combat rising prices.
What do high mortgage rates mean for home prices?
“Higher mortgage rates are necessary to cool down the red-hot housing market. They’re already slowing competition, but they’re also putting buyers in a tough spot,” Redfin Chief Economist Daryl Fairweather said in a news release.
Higher mortgage rates mean higher monthly payments. The mortgage payment on a home with the median asking price during the four-week period ending June 12 was $2,514, according to Redfin data. That's up nearly 50% from the $1,692 payment on a typically-priced home a year ago, when rates were roughly half of what they are now.
As those monthly payments rise, buyers are being forced to consider smaller homes or neighborhoods away from their ideal locations, Fairweather added. If they can afford to buy at all, that is.
Real estate experts expect that home prices will eventually fall as enough buyers drop out of the market. “That deterioration in affordability will shut many potential buyers out,” Matthew Pointon, senior property economist at Capital Economics, wrote in a research note. “That will reduce the competition for homes, and sellers will eventually see the need to accept a lower price for their property.”
Pointon expects home price growth to fall 5% by mid-2023.
For now, though, prices remain high. The median sale price of a home last month was $430,621, according to Redfin. That’s nearly 15% higher than the same month last year.