Rate hikes and home price growth in 2018 have resulted in adding more than $300 in monthly mortgage payments in certain markets in the U.S., impacting the purchasing power of homebuyers, according to an analysis by Redfin.
As an increasing number of buyers ask themselves if they should wait until prices fall or before mortgage rates rise even further, the Redfin analysis pointed out that this year's seasonal declines in prices and sales have been more extreme.
“Every fall and winter we see prices decline relative to spring and summer, but this year’s seasonal declines have been more extreme as buyers, especially in coastal markets, are finally reaching a limit in terms of how much they are willing to pay,” said Daryl Fairweather, Chief Economist, Redfin. “Sellers haven’t quite come to terms with the fact that they no longer have buyers wrapped around their finger. This push and pull is likely to continue until early 2019 when the homebuying season picks back up.”
The report indicated that while prices were still higher than a year ago, their growth was slowing in the coastal markets where homes were sitting on the market longer, more homes were available to choose from, and more sellers were dropping their prices.
Rising mortgage rates aren't helping homebuyers either. Giving an example of how these are affecting homebuying decisions, Redfin said that a buyer with a budget of $2,500 a month and a 20 percent down payment could afford to purchase a home for as much as $473,750 at the beginning of the year when 30-year mortgage rates were at around 4 percent. With rates approaching the 5 percent mark, the same buyer's purchasing power went down by $29,750.
The hikes could also impact the number of homes that remained affordable for buyers, the analysis revealed.
For a typical three-bedroom, three-bath home, where a monthly house payment budget was $3,500, an increase in mortgage rates to 5.5 percent would also reduce the number of homes for sale that would fit such a budget by 15 percent in markets like Orange County and San Jose, California and Honolulu, Hawaii. In markets like Boston, Seattle, Los Angeles, and San Diego the selection would shrink by 10 to 14 percent, the analysis indicated.
These factors would also impact the square-foot area that a homebuyer could afford, the report revealed, even if prices fell, offsetting the cost of rising mortgage rates. The report said that this was because the bigger a homebuyer's budget, the bigger price drops would be needed to balance out increasing mortgage rates. "For example, if your budget is $2,500 a month, you would need to pay $18,000 less for your home to make up for a jump in mortgage rates from 5 percent to 5.5 percent, but if your budget is $3,500 a month, your home price needs to be $25,250 less to keep your payment the same. In most markets that means you’ll be looking at homes that are 100-200 square feet smaller," the analysis revealed.