Homebuyers lost over $100K in buying power with rising mortgage rates, study says

Homebuyers have lost six figures in buying power over the past year, thanks to soaring mortgage rates, according to new research.

It’s the equivalent of about $140,000, a new report from RedFin calculates, as mortgage rates jumped to 6% since the beginning of the year.

“Raising interest rates is necessary to fight inflation, but it comes with some painful side effects — especially for homebuyers,” said Chen Zhao, Redfin’s economics research lead.

Based on a $3,000 monthly budget, a buyer can get a home around $479,750 with today’s interest rate of 6%, according to RedFin’s calculations.

A year ago, they could have gotten a home of about $621,000 with the same monthly budget when rates were about 3%.

The jump in rates is putting more pressure on buyers that have already been dealing with a torrid housing market marked by low inventory, high prices and bidding wars, said Craig Garcia, president of Capital Partners Mortgage in Coral Springs.

“And for the folks who have been in the game this year [looking for homes] they have seen their monthly payment situation getting worse. Not only do they have trouble finding a home that they would like, they are looking at a significantly higher payment than before,” he added.

For many buyers, it’s forced them to make adjustments on how much they are able to spend monthly on a home, or even the type of home or area they want to live in. Some are pivoting to adjustable-rate mortgages in the hopes of getting a cheaper initial rate and possibly refinancing in the future.

For others, it may prevent them from qualifying in general.

“Some people may have lost the ability to qualify overall. If you were very thin before — which many people were, given where the property values have risen to — you may have been basically pushed out where you can’t qualify for a whole lot,” said J.C. de Ona, Southeast Florida division president for Centennial Bank. “At some point earlier this year, they were perfectly fine qualifying for a house in the area they were looking, but now they can’t.”

Why are rates rising?

Mortgage rates hit a record low of about 2.6% during the housing boom, helping fuel a soaring housing market as buyers jumped to get record-low rates.

Rates hovered about 3% during 2021, before they started to creep up in 2022 as the Federal Reserve announced it would be working to combat rising inflation in the country.

Now, rates for a mortgage are the highest they have been in about 15 years, having reached 6% in September.

It remains to be seen if rates will keep rising and whether it will continue to have a cooling effect on the housing market.

“Generally you will see the market cool off, but ultimately I think it will be short-lived before the market gets going again,” de Ona said. “There are those who held off on buying a home [when the rates went up], so when the rates go back down, you’ll have that pent-up demand that will start the market back up again.”